The following article was written by one of our advisers, James Melhuish of Money Works. We think it’s a well written original and thoughtful article.
It seems like you can’t walk from one side of the street to the other at the moment without someone asking “have you heard about Bitcoin?”
Well yes, we have.
Thankfully we have also been in the game long enough to see faddish hysteria happen again and again. We have watched bubbles come and go in many unsecured, speculative investments: prawn farms, pine tree farms, jojoba plantations, social media platforms, dating apps, fidget spinners and many more.
As professional financial advisers, we have had quite a few conversations lately about the most well-known blockchain-derived currency. In more switched-on circles, folks are talking about Ether, Ripple, Dogecoin, Litecoin, Cream, AML Bitcoin…. the list goes on. Some are cryptocurrencies, some aren’t. Many people wouldn’t know the difference.
In economics, what we’re seeing is known as the “greater fool” theory. The theory permits that price may irrationally diverge from intrinsic value so long as the market holds the belief that there will be a greater fool tomorrow to buy from today’s buyer.
If it sounds like a con, consider all money only has value because we agree it does.
What differs with digital currencies is that Mr Market can’t decide what to value it at.
Maybe a country bans it, or maybe it buys it from its federal reserves.
Maybe it’s strong-crypto, untraceable and untaxable; or maybe it’s reportable to be taxed the same as any other asset (which softens the crypto benefit).
Maybe you keep your stash, or maybe the exchange shuts down, your wallet gets hacked or you lose your access codes. All true stories too.
Have you ever been told the disclaimer “past performance is not an indicator of future returns”? We use it because none of us can tell the future.
Many stories have hit the news about how someone bought $100 of Bitcoin and is now worth $XXmillion. It’s historically demonstrable. If you buy 10,000 of something at $0.01 and the price goes up to, let’s say, $20,000 each (BTC is currently around $17k): well done you. You can buy us a beer and tell us how to do it again.
But buying at $20,000 and expecting the same returns is to presume the price will go to $2million per coin. That’s bold optimism – disregarding all the choppy water volatility if it ever makes it there.
Will people keep making money on BTC? Sure. Will people lose money? Surely also. Are the fantastical returns easily replicated? You do the maths.
Walk into the casino and roll the roulette wheel if you like gambling- but never bet the house on it.
Blockchain technology and digital currencies are here to stay. Will we tell you which ones are the best to bet on? No way. Not at the moment. Not for a good measure of time yet.
Sound financial advice is about investing in cashflow-producing assets you can understand, for the long term – and being able to sleep at night knowing your investments will still be there in the morning.