The rise in the popularity of Bitcoin and other so called crypto currencies was a trend in 2017 which I chose not to follow. Here are some reasons why.
Stories of Bitcoin speculators having increased the value of their investment by over 600 times has fuelled its popularity and driven up the price. This is classic asset bubble behaviour. Asset pricing bubbles have a habit of bursting, leaving investors with large losses. If an investment looks too good to be true, it usually is.
Crypto currencies are not supported by any assets. Their value depends on the number of buyers and sellers in the market. While traditional currency valuations are also influenced by the weight of buyers and sellers, Government's own tangible assets, supported by the collective wealth of their taxpayers. Even so, speculating on any currency is a high stakes game and should only be undertaken by those able and willing to lose capital.
Governance Issues
There is no regulation of these "currencies." Their supporters view this as an advantage and speak about people power self regulating the market. This is an understandable reaction to the 2008 financial crisis, which saw central banks unable to prevent market abuse. However, embracing a non regulated market, just because the regulated market has shortcomings, is not a logical response.
Currencies issued by governments rise and fall but have governance structures and recourse to supra national bodies, such as the World Bank or International Monetary Fund, which can provide support. These additional safety nets are not available to crypto currencies.
Terms such as transparency are used to describe how the crypto currency market works. This is a fantasy. Few understand the mathematical basis of "mining". The use of this term carries allusions to commodities, such as minerals or oil, which have a use in the physical world. The solving of a complex mathematical formula, the process for “mining” of crypto currency has no other practical application and no intrinsic value.
Diversification Myth
Some crypto enthusiasts are aware of the volatility risk and believe that by diversifying into a range of crypto currencies they are edging their risks. While diversification of investments can reduce risk of loss, it is only effective if assets in an investment portfolio are likely to react to events in different ways. The classic example is investing in both umbrella and ice cream manufacturers. All “cryptos” depend on the same factors to support their valuations. If one falls, they are all likely to come under pressure, so buying several different crypto currencies is unlikely to provide protection.
Consumer protection
- Lack of regulation means that there is no protection of funds invested, costs of investing, nor protection of consumer data. Those who speculate in this market are making their personal details potentially available to criminals.
- Crypto currencies cannot be easily converted into goods and services. Few businesses accept them as legal tender and so converting realisable gains into useful things is difficult. This raises questions of value for money.
Ethical concerns
- The "mining" process involves powerful computers all over the world racing to solve a complex mathematical problem. It is estimated that this uses more energy than the annual consumption of Serbia or Ireland.
- Lack of regulation makes speculation in crypto currencies a magnet for criminals, terrorists and tax evaders, who can launder money under the radar of the authorities.
At best buying crypto currency should be seen as a gamble. Like most bets, the punter has a high expectation of loss. Unlike regulated gambling though, collecting any winnings is not straightforward. Followers of this fashion should be prepared for potential loss of their stake, and their personal data, with no consumer protection redress.
Kay Ingram
Director of Public Policy, LEBC
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. The value of investments can fall as well as rise and you could get back less than you invest.
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