Question

A number of my friends have made a lot of money by investing in Bitcoin. Should I invest in it?

Answer

If you invested R100,000 in Bitcoin a year ago, it would be worth more than R500,000. Go to any social gathering and you’ll hear people, behind their masks, talking about someone who has made a fortune with Bitcoin. This can create a Fear of Missing Out (FOMO).

The question for me as a financial adviser is whether I should be including Bitcoin as part of my financial recommendations.

I have attended innumerable webinars, listened to podcasts and read many articles on Bitcoin, blockchain and cryptocurrencies and still cannot speak with any real authority on the subject. With that health warning, I will, however, share my thoughts on what you should consider when making a decision.

Cryptocurrencies exist in the digital world and control is managed by a wide network of people using something called blockchain. (I know I am oversimplifying things here.)

Cryptocurrencies are attractive because:

• They are independent of countries. Transferring money from one country to the next is very simple and cheap.
• The supply of currency is controlled. There will only ever be 21 million Bitcoins. This does imply that there will be value stored in the currency. Last year, the US printed 20% of all the dollars that have ever been issued.

I believe that cryptocurrencies will be around for the foreseeable future. However, there are more than 4,000 cryptocurrencies. While Bitcoin is the largest, there are others such as Ethereum and Tether that are gaining in popularity. So which cryptocurrency do you go with? If you go with the wrong one, it could be costly.

There is a solution to this. There are companies that sell structures that track the performance of a range of cryptocurrencies. This will diminish the risk of choosing the wrong one.

Now we come to the question of whether it makes sense to invest in cryptocurrencies.

The big challenge for me as a financial adviser is that, before I can make a recommendation, I need to understand:

• How an investment works;
• How it is valued;
• What factors impact its growth; and
• What its risk profile is.

Is Bitcoin cheap or expensive? Will it grow at the same rate as it has done up to now, or will it slow down or even decline? We have techniques to value traditional investments. This gives us a common language to discuss them and debate the intrinsic value of particular investments. We can eventually make an educated call on whether the investment represents good or bad value.

At this stage, I have not come across an investment manager who is able to help me understand whether a particular cryptocurrency is over- or undervalued.

A year ago, a Bitcoin was worth R140,000. It is now worth R740,000. Two weeks ago, it was worth R920,000. I have no framework to understand these prices and the reason for the movement. I have no way of understanding whether last year’s price of R140,000 was good or bad. I have no idea as to whether the current R740,000 represents fair value. I cannot recommend that a client invests in an instrument whose value I cannot understand.

If you do invest in cryptocurrencies, understand that it is a volatile and risky investment. Do not use your pension or the family’s food budget. Understand that it is a risky investment and that you could end up losing money.

Be careful in choosing a company to invest through. At this stage, this market is not regulated by the Financial Sector Conduct Authority (FSCA) and there has been a spate of scams that have used the massive returns offered by cryptocurrencies to lure investors. The FSCA recently issued a second warning that consumers should be very careful when investing in cryptocurrencies.

So to answer your question: cryptocurrencies are probably here to stay but, at this stage, there is no reliable way of valuing them. It is difficult to know if it is overpriced or not. Investing in cryptocurrencies like Bitcoin, therefore, comes with a massive health warning. You can make a lot of money – but you can also lose it just as quickly.