Whether you’re a ‘crypto fan’ or a ‘crypto sceptic’ you probably have an opinion regarding digital currencies.
It is an area of finance that grew from nothing ten years ago to rivalling the size of the UK economy in 2021 – before shrinking around 60% since the end of 2021.
We are currently in the depths of a ‘crypto winter’ (I promise to stop using ‘crypto’ like this) which afficionados seem confident will end in 2024, before the next ‘bull run’.
This sounds a lot like superstition to me, almost an article of faith for the true believers – but of course that doesn’t mean it won’t come true, as markets are driven as much by sentiment as fundamentals.
So, what is the block chain, bitcoin, the digital ledger? And why does it matter?
You may know that Bitcoin was the first cryptocurrency to be invented. My someone who is only known by their nom de plume, Satoshi. No-one knows who Satoshi is, or even whether they are alive, a single person, or even a group of people. That probably isn’t an auspicious start to a revolution in finance, but over the period from 2013 to 2021 Bitcoin grew from nothing to a market capitalisation of well over a trillion dollars.
Bitcoin is not the only coin that you can buy. Indeed there are some 29,000 coins out there, with over 8,000 of them considered to be ‘active’, and almost 800 having a current market capitalisation of over $10 million.
It is an area of huge risk for investors. There are new coins created every week, known as ‘initial coin offerings’ – which is an area of especial interest to regulators. Many of these coins are ‘minted’ to do something specific, to provide a currency to fund a newly created ecosystem. There are coins to create a market in computing power, so individuals can provide computing power to the market, and others can purchase time on those computers to solve their problems. There are coins that fund ‘play to earn’ gaming environments within the huge ‘eSports’ market – the global eSports market (computer gaming for financial reward) is worth well over £1 billion now and is only forecast to grow.
If you can imagine a financial ecosystem that needs some way to keep track of performance, then someone somewhere will have created a digital currency to fill that niche.
Of course, not all these projects will succeed – and indeed many will fail, and their related coins will end up effectively valueless. On top of this there are very many scams, where there is no project behind the marketing – just an anonymous group of hackers dedicated to separating investors from their money.
Beyond these utility projects are ‘meme’ coins – where the essential idea behind launching the coin is that it has a cool logo. Dogecoin has a cute dog as its logo and is worth $8.5 billion. Pepe has a cute frog and is worth quarter of a billion dollars. Shiba Inu is a cute Japanese dog and is worth $4 billion. So, the lesson from this? Dogs are cuter than frogs. There is nothing inherent in any of these coins – they serve the same purpose as Bitcoin, but came later, and despite having no special features other than a cute logo, successfully carved out their own corner of the market. But hundreds if not thousands of cute logos failed to gain traction, and their investors lost their money.
So, should an investor have exposure to crypto currencies? It is possible to invest into Bitcoin or other coins directly – but the technical barriers are not tiny, and fraud is rampant. Many people dabble and decide it isn’t worth the risk. There are investment funds that have crypto exposure, either directly, or through buying companies that have their fortunes linked to the price of Bitcoin – but as yet direct ownership isn’t a regulated investment, so investor protection is limited.
The first rule of investing is ‘don’t lose the money’. The second is ‘see rule 1’. And these rules come from the renowned billionaire Warren Buffett, so may be worth thinking about. FOMO (the fear of missing out) has caused huge numbers of investors to make unwise investments with little or no recourse should something go wrong and crypto scammers (sorry I promised to stop using crypto as a prefix, please forgive me!) are grabbing a very unfair share from naïve investors.
A number of giant investment houses, including Blackrock, the world’s largest, have applications in for authorising a Bitcoin ETF (exchange traded fund) and it is widely expected that they will gain authorisation in the coming months. When this happens it seems likely that there will be wide interest from an entire group of investors who currently feel the risks outweigh the opportunity, but who will feel that the safety provided through a brand name like Blackrock make such an investment worthwhile. I don’t know whether that’s true – but it’s unlikely to hurt!
Whilst as a regulated financial adviser I have to be very careful to say that any investment carries risk, and prices can fall as well as rise – it seems likely that cryptocurrencies are here to stay. I think today it is only a very brave, and possibly foolhardy investor who would include cryptocurrencies in their portfolio if they weren’t very knowledgeable about the subject. But in a couple of years it would be pretty reasonable to expect such investments to begin to make an appearance in many portfolios, and I think that in 5 years’ time it will only be old fashioned hold outs who choose to exclude the block chain based digital financial landscape from their investment portfolios. We live in interesting times, and the times they are a changing.
At Walden Capital we try our very best to keep abreast of trends for our clients, whilst being mindful that bandwagons are something to watch as they crash, rather than something to jump on. The assurance of professional bespoke financial planning does not come from leaping into the unknown, it comes from using inspiration and perspiration to analyse what is available, and diversify to reduce your risk of disaster, whilst capturing growth over time.