Crypto Currencies as Investment

If you are wondering whether digital currencies like bitcoin and ethereum is a wise asset group to invest your money in, this a first post that that is not about a specific investment, but about this asset class.

I am quite reserved towards crypto as an investment and I will explain my views. I will also present the bull case for crypto investing so that you can make you own assessment.

Definition-Crypto currencies such as Bitcoin are digital currencies not backed by real assets or tangible securities. They are traded between consenting parties and tracked on digital ledgers.

Today’s Cryptocurrency Prices by Market Cap

The case for investment (Bull Case)

We have seen a tremendous rally in Bitcoin and Ether prices in the past year and attention is once again drawn to the crypto space. Many investors mostly with little experience, many from tech area, have been piling into all sorts of criptocoins.

With about 10-year price history, bitcoin has been among the best performing assets. Five years ago, a $10k investment in bitcoin would be worth over $500k today. In fact, during any yearly holding period since inception through 2020, bitcoin’s return has been positive. The bulls see potential bitcoin roles in the future as:

  1. Global settlement network
  2. Protection against seizure of assets
  3. Digital Gold
  4. Catalyst for currency demonetization in Emerging Markets

A key investment thesis is that bitcoin will earn an allocation in well diversified investment portfolios and rise from roughly $200 billion today to $1-5 trillion network capitalization during the next five to ten years and nobody can ignore bitcoin as a new asset class (Ark Invest, 2020).

All sounds great. Isn’t it? Very few of the bulls mention risks or valuation.

My Views on Crypto

Fear of missing out (FOMO) is an increasingly powerful emotion in our daily lives. When it comes to investing, FOMO is significantly impacted by recency bias. Our fear of missing out becomes more and more intense after the market has just experienced an increase in crypto. After the market has done well, recency bias and FOMO causes investors to be more afraid of missing a bull market than of suffering large losses. Changing one investment strategy due to a FOMO on what was working for others over a short time period would have been a drastic mistake.

If you do invest, be prepared to lose some or all of your money. Crypto is not conventional investing. Bitcoin is at the very high-risk end of the investment spectrum. The price of crypto currencies is highly volatile, some can go bust and others could be scams.

I see 4 main risks that are very probable to happen. They are quite technical and not easy to understand by the new generation of investors:

  1. Regulation– it is reasonable to expect governments and financial intermediaries will regulate this new and emerging technology and current status quo will disappear. see latest news on Ripple-XRP as a warning; regulation is coming with a vengeance.  
  2. Custody Risk and Institutionalization– your crypto is held on your behalf by a third party, mostly non regulated and not supervised; If institutional investors come in, cripto investors could face custody of assets by third parties, limiting the satisfaction exchanging globally and freely;
  3. Fraud Risk– losing your crypto to scams created by parties with ill intentions;
  4. Token Specific Risk – A permanent lack of market makers and credit risk in tokenized debt

Conclusion

As Mike Tyson said “Everyone has a plan until they get punched in the mouth”.

Crypto currencies could become mainstream, vanish or anything in between. We are dealing with a market that largely does not have rules, regulation or supervision and is less understood by investors. Investors in crypto are mostly individuals with little experience on one side, sharks and hedge funds on the other side.

Most trading platforms and miners are located in shady locations in emerging markets.

Ask yourself:  what are the chances for a small retail investor to emerge as a winner? Be aware!

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