01 Feb Bitcoin and the Rise and Fall of Cryptocurrencies
Unless you have been in a remote jungle for the last six months (making sure that to avoided B-grade celebrities inhabiting the same space) you will have been inundated with advertisements and opinion on Bitcoin.
Although ASIC has previously declared Bitcoin is not a financial product, we are aware that individuals are seeking some guidance around whether they should invest. This could be a small or large part of their savings into the potentially lucrative market. As such, we felt it was worthwhile to provide some analysis of the current cryptocurrency trend.
Firstly, Bitcoin has all the hallmarks of a fad investment enhanced by pure speculation and discussion of the cryptocurrency has dominated the investment media over recent months. Bitcoin and other crypto currencies have enjoyed a spectacular rise in the lead-up to Christmas but it would now appear that the meteoric rise was an investment ‘bubble’ as Bitcoin’s price has backtracked dramatically in January and at present has fallen around 50% from its lofty heights.
Recent investment advice from expert investors, including Jack Bogle, founder of Vanguard and index investing, are pretty simple and blunt: You should avoid Bitcoin speculation “like the plague”. Commentaries like these have possibly added to the stampede for the exits.
At a cursory glance the case for using a non-bank controlled medium of exchange seems compelling however, the arrangements supporting Bitcoin are very complex and require a deep dive prior to making the commitment of one’s hard earned capital. After all, one of the major rules in investing is firstly to understand what you are buying before you pay good money.
At its heart, Bitcoin (which we will use as a proxy for consideration of all cryptocurrencies) is a unit of valuation and a medium of exchange. As such, Bitcoin could be a replacement for cash, your visa card or even for gold. So the first question when assessing Bitcoin is whether its main roles are being fulfilled?
To our thinking the immediate issues here are:
- With the dramatic volatility in the price of Bitcoin, would we use it as a currency for any trade, since we could end up losing a substantial amount on our receipts? Imagine selling a house for bitcoin, where the exchanged value was equivalent to $1,000,000 today but by the time contracts are exchanged, the bitcoin arriving into your account is now worth $500,000!
- Although one of the attractions of Bitcoin is that anyone can pay and be paid, this ability to transfer amounts anonymously does not sit well with global efforts to stifle money laundering and terrorism funding (not to mention how much has been hacked by North Korea). Given the issues the Commonwealth bank had where cash passing through its ATM network bypassed the anti-money laundering regulations, we would expect that in the near future any banks and their regulators will be keen to restrict the access and flows in Bitcoin.
- There is no actual return from holding Bitcoin (it doesn’t pay interest or rent) and further, as there is no regulation of the exchanges that hold most of the currency, who says you can ever actually get your money back?
These are fairly basic observations and we would not profess to understand all of the nuances of Bitcoin. As such, we decided to provide a link to more in-depth review.
The review is provided by Platinum Asset Management and they have extensive experience in global investment markets. Their approach is refreshing and they take a very long, hard look at any investment before committing investor funds. They since they tend not to get caught up in overly bullish sentiment or investing too much into the latest fad. As such, Platinum have a history of managing investor’s accounts to achieve positive returns in volatile and falling markets.
We hope that you will find this link to be a valuable and interesting assessment of Bitcoin.
Please note that this article is general in nature and should not be taken as advice to invest in Bitcoin of any other cryptocurrency (or a related financial product).