Cryptocurrencies — An Investment or Something Transient?
Everything you don't understand about money combined with everything you don't understand about computers
Like everything with a rising price tag, cryptocurrencies have garnered global recognition and interest for their sudden increase in value. Crypto has crept from being a bet in the domain of tech lovers and the geeks to the wallets of the mainstream investor. And it’s not just the financial industry that’s paying attention — from experienced investors to individuals just beginning their investment journey, many are wondering — ‘Are cryptocurrencies something I should look into?’
First, a few points to note:
Cryptocurrency is a digital currency stored on blockchain technology.
Cryptocurrencies are not backed by any assets or central banks and they are unregulated.
They can be more volatile than traditional investments and involve various other risks.
You can only buy cryptocurrencies online, with the “physical” storage in the form of 1’s and 0’s.
Using an evidence based, academic framework like our investment philosophy can offer a perspective into the world of digital investing.
Cryptocurrency is a digital asset stored on blockchain technology that serves as a type of currency or store of value. Unlike traditional currencies, cryptocurrencies aren’t backed by major governments or developed economies. This decentralisation means that blockchain technology validates these digital transactions without oversight. While they are generally meant to serve as a medium of exchange, much of the attention they receive is as a financial investment. A look at the YTD returns of the 10 biggest cryptocurrencies (in the chart below) delivers some eye-popping numbers.
Who wouldn’t want returns like this? The surging value of these cryptocurrencies can make it tempting to invest, but consider these risks before purchasing a digital currency:
With value comes volatility. In recent years, cryptocurrency prices have experienced wider fluctuations than traditional assets (such as stocks and bonds), with some dramatic short-term drops. This volatility makes cryptocurrencies impractical as a medium of exchange, and the sudden price movements can encourage impulsive buying and selling. Additionally, these market conditions can make it difficult to liquidate a position in a timely manner, making liquidity risk a real concern. As shown below, some cryptocurrencies can suffer -100% losses, essentially wiping out your capital.
Unlike stocks and bonds, cryptocurrencies don’t pay dividends or cash payments, and therefore don’t offer any intrinsic value for the sizeable amount of risk the investor takes on.
Without regulation, oversight, and someone in charge, it seems difficult for cryptocurrencies to be able to achieve the value and quality of other major currencies.
Cryptocurrency exchanges are subject to breaches, disruptions, and failures that can jeopardise investors and their personal information. Since cryptocurrencies aren’t currently backed by any major governments, investors are unlikely to recover lost funds. Here are some examples.
Given the nature of cryptocurrencies and the inherent risks, we view the investment case as weak at this point in time. As many of our clients know, our investing philosophy encourages the use of academic research as the foundation for investing, staying the course and tuning out the noise. We emphasise that investing for the long-term is essential and reacting to short-term trends can be costly for one’s portfolio.
While we may not currently offer cryptocurrencies as an investment option, the potential and the impact they’re making in the investing world should not be taken lightly. As cryptocurrencies and blockchain become increasingly mainstream, we’ll continue to monitor their development and discern the best path forward if this should be an asset class to consider.
