Does Crypto Have a Future?
The individual investor should act consistently as an investor and not as a speculator
The lifespan of cryptocurrencies may be short but they’ve gained traction as one of the hottest — and most speculative — investments on the market. There are stories of great and quick success from betting on crypto but the recent news has been anything but smiles and rainbows. The latest collapse of the wider crypto market has brought down with it many so-called stablecoins — crypto assets that were supposed to have lower volatility as they were meant to be pegged to a real asset class or commodity. As you can see from news outlets like Bloomberg to The Guardian, lawsuits involving angry crypto investors are piling up:
Get-rich quick?
Unfortunately a lot of the hard-luck stories stemmed from a few fundamental mistakes that these “investors” made.
To mistake speculation/gambling as investment.
To put all their eggs in one basket.
To be blissfully unaware of the possible downside.
Today it may be cryptocurrency. Not too long ago it was a gold scheme, nickel trading, and penny stock scandal. Many were caught up in the “get-rich quick” scheme and suffered significant losses. While it may be tempting to chase the latest investing trend, our guidance is to avoid fads, stay focused on your goals, and invest for the long term.
Should I Consider Buying Some?
As mentioned, some investors have had success trading various cryptocurrencies in the short term. However, there are a few issues that can make crypto a problematic investment for long-term portfolios:
They’re highly speculative — while you may gain a quick win with these investments, there’s no evidence that they’re built for the long term.
They have high commissions — many crypto platforms charge high fees, with some as high as 2.5% per trade.
They have significant volatility — market swings for asset prices happen all the time, but the price fluctuations of many cryptocurrencies make them relatively unstable (see below).
The rolling 30-day volatility of crypto can be significant. Even with Bitcoin, arguably the most well-established cryptocurrency — which has relatively tame volatility compared with some of the other popular coins, is considered extremely volatile when compared to “normal” assets (shown below).
Back to The Basics
If we were to drill down to the foundation of investing — remember that we provide capital (either in the form of shareholding or loans) in companies and businesses in order for them to expand, create better products, and to generate a higher cashflow. As shareholders, we receive a portion of the cashflow from profits and as bondholders we receive the interest from the loans that the company has to pay back to us. The cashflow that the company pays to its investors — to put it simply — are profits derived from the business after taking away its costs like rental, wages and taxes.
Cryptocurrencies, on the other hand, do not generate a cashflow like businesses or even like a property investment and their prices are determined purely by demand and supply.
Our investment philosophy has served us and our investors well through market ups and downs — especially the recent Mar 2020 pandemic. Core principles such as avoiding speculating, considering the risk first, staying disciplined throughout cycles, and seeking returns which are evidence-based, have been tried and tested over decades.
If you find yourself debating whether to dip your toes into the current investment craze, come and have a chat with us first to see what the alternatives are and to get a proper second opinion on what you should do.
