‘I’ve just made fifty grand in a week’ a wealthy individual said to me recently. His comment had a hint of pity for me because I had decided to be cautious about crypto currencies and had not invested.
I have yet to have anyone explain to me in plain English quite what Bitcoin or Ethereum actually are, or how Blockchain works and yet the total value of Bitcoin exceeds that of most global companies! My guess is that many investors are basing their decision on the attraction of quick and high returns. Does it sound rational to invest in an asset that you do not fully understand?
Similarly, how do crypto currencies score on Environmental, Social and Governance issues? What about the Dark web? Should we be concerned about the ethics of Bitcoin?
Performance and Risk
We all love to brag about our winners whether it be a horse race, fruit machine or, like my friend, an investment. We tend to keep our failures a little more to ourselves. On 15th December 2018 Bitcoin was trading at $14,748.90 but if you bought then you were sitting on an eighty percent loss in value just two months later. Admittedly since then it surpassed those numbers and breached $50,000 before falling by thirteen percent in fifteen minutes!
These levels of volatility and risk are not likely to be appropriate for our personal financial goals, and if you are saving for retirement or that deposit on a house, you are using capital you can ill afford to lose.
Pick and shovel
If you are tempted, then perhaps an alternative strategy is what we call the ‘Pick and Shovel’ play: During the Californian Gold rush not every prospector was lucky enough to find Gold, but every prospector needed to buy a shovel and a pick. An investor was rewarded for investing in a provider of the tools that were needed rather than the end product itself.
Perhaps the smart money has moved on from investing directly in crypto currencies, but a savvy fund manager might want to start looking at companies who will benefit from the use of crypto currencies or who provide a service to it.
I still have a sense of unease, particularly when everyone is talking about it. The great investor Warren Buffet was quoted as saying ‘When my Secretary starts talking about a stock, I know that it’s time to sell it!’
Director, Trinity Wealth Management