Is cryptocurrency a good investment?
So far, I've seen very little to convince me that the cryptocurrency world isn't a scam. But millions around the world disagree so am I missing somethining?
I've never considered adding cryptocurrencies to my investment portfolio.
That's despite knowing people personally who've made 7-figure fortunes from buying low and selling high. These people swear to me that this digital gold is an excellent long-term investment.
But I thought the many cryptocurrencies were a new form of virtual currency? It can't be both a currency and an investment. Traditional currencies are means of buying and selling goods and services. They're not an investment because their value is eroded over time by inflation.
The messaging on the supposed opportunities of cryptocurrencies is so mixed that it's genuinely hard to know where to start evaluating them.
Which crypto tribe do you belong to?
My crypto friend told me that there were three types of people in the world:
- Early investors like him who made out like bandits because they invested at the right time (see success stories here)
- Those who throw stones at the first type because they're pissed off with life because they didn't buy into Bitcoin early enough and probably got stung
- Those who miss the boat and are still perplexed at the sector (that's probably me).
In 2010, one of my VC contacts invested $3,000 into Bitcoin when they were priced at $0.15 when he was drunk (this is his version of late-night alcohol-fuelled spending on Amazon). He forgot about the 20,000 coins he had for years. Later, he remembered selling 2,000 of them for $350. A few days later when the price hit $800, he sold 2,000 more.
By this point, he'd netted $2,300,000.
In recent times, institutional investors have started touting cryptocurrency investments to tempt the average investor. So what's going on?
I missed the crypto gravy train, according to my friend
Time for a spot of navel-gazing...
- Am I a Luddite in his mid-40s who struggles with new concepts and technology and still pines for the days of 5-CD changers in his car?
- Have I missed the boat because of my apparent inability to multitask well? Has my somewhat singular focus meant that I have been preoccupied just by the wealthbuilding vehicles I'm working on at the time?
- Am I alone in thinking the hype for blockchain technology is oversold and not fit for the intended purpose?
- Is my risk tolerance so low that I can't countenance investing in an asset class where I could lose money very quickly because of the incredible volatility in pricing?
- And are these digital assets really assets just like other asset classes or a (probable) passing fad like the faintly ridiculous non-fungible tokens (NFTs)?
- Is crypto really a viable replacement payment method? Bitcoin was and remains a rubbish payment system. At least I can spend my dinosaur fiat currency in the shops. If I do find somewhere that accepts Bitcoin, it takes an hour on average for the blockchain network to validate transactions.
When I figure out the answer, I'll be sure to update this blog.
What I know I don't like about these digital assets
I know what I don't like about cryptocurrencies and that's:
- Their environmental impact
- The shady promotion of them to kids by influencers taking dollars from the big marketing companies
- The security breaches and rip-off merchants that plague the sector make it ripe for banning and heavy regulation, both of which will be "value"-destroying? (check out "crypto exchanges scams" on Google for confirmation - link)
Cryptocurrency pricing and market value both look on shaky ground to me
Supply, demand, pricing and market cap in the crypto market are very interesting but completely opaque.
Upside potential only bettered by downside potential
If you believe demand for crypto is going to increase then cryptocurrency could be a good investment. Markets generally price in increased demand.
That could but doesn't explain the jump in price from $31,500 in July 2021 to $64,400 in November 2021. During that period, there was no apparent surge in demand for Bitcoin ownership. Real-world usage of crypto didn't double either and no one forecast that it would.
Its fall from $64,400 in November 2021 to £19,200 in June 2022 didn't follow stories that real-world usage and demand for Bitcoin ownership had or would fall by two-thirds.
How can you predict future prices based on a track record like that? Crypto doesn't seem to react to normal pricing signals. Which professional investment advisor would recommend Bitcoin for their clients' portfolios unless they had nerves of steel and a very robust professional indemnity insurance policy?
A hedge against rising inflation?
QE and low-interest rates followed the Great Recession. The combination of these policies caused some to fear that Western economies could go on the same death spiral as the Zimbabwean economy.
These predictions never came to pass. The target destination for these mountains of newly-minted money resulted in higher asset prices.
Late in this cycle, buying cryptocurrency ceased to be primarily a hedge against currently suppressed future high inflation - it became a digital asset in and of itself. As a result, both the price per coin and overall market caps for most major cryptocurrencies shot up. Even boring old housing and stocks enjoyed meteoric rises (compare the Dow Jones low of 2009 against where the market is today) as money looked for a new home although the surges in these markets were eclipsed by crypto.
Then the pandemic happened and even more money was printed out of thin air. NFTs, mentioned earlier, became a thing and simply owning a link to a digital work of art commanded millions of dollars, despite the fact that assets could be easily copied and distributed mainly free from the fear of punishment.
In this frenzy, investors began looking for the latest crypto projects to invest in. Everything from the decentralized exchanges of the blockchain industry to smart contracts replacing e-signing, traditional document storage and old-fashioned wet contracts were considered.
Recent reports that crypto owners have had trouble selling their assets for the much-derided fiat currencies are not surprising.
With inflation high and interest rates rising, the amount of spare dollars, pounds, euros and the Japanese yen available to purchase crypto assets diminishes too.
WWWD? (What would Warren do?)
When thinking about how to invest so I get a better return than just keeping cash in bank accounts, I get Warren Buffet to do my due diligence for me. Not personally of course - I just watch to see what the great man thinks.
Buffett once described Bitcoin as “probably rat poison squared. It’s got a magic to it and people have attached magic to lots of things. The one thing I’m pretty sure of is that it doesn’t produce anything."
Charlie Munger, vice chairman of Berkshire Hathaway described by Warren Buffett as 'his right-hand man' said "I try and avoid things that are stupid and evil and make me look bad in comparison to somebody else – and bitcoin does all three. In the first place, it’s stupid because it’s still likely to go to zero. It’s evil because it undermines the Federal Reserve System ... and third, it makes us look foolish compared to the Communist leader in China. He was smart enough to ban bitcoin in China.”
Is cryptocurrency safe for the environment
I am fully signed up to the UN 2030 agenda for sustainable development which aims to:
- protect the planet from degradation including through sustainable consumption and production
- sustainably manage its natural resources
- take urgent action on climate change, so that it can support the needs of the present and future generations.
I was shocked by the environmental impact of cryptocurrencies. Let me explain if you've not heard this before.
How cryptocurrency is won
Most cryptocurrencies require mining. Mining is a process in which very complex maths puzzles are solved which require inordinate amounts of computing power. Once you solve the problem, you get a "proof of work" certificate and your coin.
Most cryptocurrencies only allow a finite number of coins to be produced. As more coins are mined, the maths puzzles become harder meaning that even more computing power is needed to mine a new coin.
Cryptocurrency mining is extraordinarily damaging to the environment
Speaking to the Guardian, Benjamin Jones, a professor of economics at the University of New Mexico, said that the amount of electricity used to mine bitcoin “has historically been more than [electricity used by] entire countries, like Ireland”.
Miners tend to gravitate towards countries with the cheapest electricity prices. That was China for a long time (until they banned it) but now the USA, Nordic countries and Baltic countries are favoured destinations not only for energy costs but on property rights too.
Talking about banning it is all well and good. But miners use exactly the same electricity as everyone else so, other than looking for local surges in demand, difficult particularly on an industrial estate, the law is very difficult to police.
Measuring the environmental impact of the mining of digital currencies
The Guardian quotes Cambridge’s Centre for Alternative Finances that a single transaction of bitcoin produces the same amount of carbon as watching YouTube for 51,120 hours or 680,000 Visa transactions.
Centralized exchanges are cleaner than Bitcoin and other cryptocurrencies.
The appeal of crypto investing to blokes, millennials and Gen Z
Our gender and our age group have always affected our financial decisions and it's no different with cryptocurrencies.
Millennials and Gen Z think crypto is a great investment
Millennials like cryptocurrencies, Ether tokens and distributed ledger technology whereas Gen Z seem interested but not quite as enthusiastic. Part of this is low-risk tolerance but mainly a lack of spare money.
Originally conceived as a joke, the Dogecoin went viral after Elon Musk, a poster child for both millennials and Gen Z tweeted "Doge". It went up 20% straight after the tweet eventually surging nearly 50%.
Blokes dig crypto more than women
U.K. fintech Mode found that older investors and women generally stay out of the crypto market. They found that 70% of their users were men.
CNBC and Acorn’s Invest in You: Next Gen Investor survey found two-thirds of investors are men reflecting the gap also seen in real estate, mutual funds, ETFs and stocks.
Interestingly, CNBC calls this a "big gender problem". Personally, I would say that women aren't as easily fooled as we blokes sometimes.
There's no shortage of "stars" trying to convince us that cryptocurrency is a good investment
Go onto Twitter and YouTube and there seems to be no shortage of celebs and influencers promoting the hell out of crypto and blockchain technology.
Kim Kardashian is a very smart woman - a billionaire, no less. But did you know she's big into crypto assets? She ended up getting sued when the EthereumMax scheme she was promoting turned out to be a scam, alongside boxer Floyd Mayweather Jr and basketball player Paul Pierce.
Every time a new altcoin is launched (basically anything that isn't Bitcoin), a horde of influencers are happy to take the coin to promote it. It makes you wonder how many of these influencers take the risks that they're asking their followers to take?
I find it all very distasteful.
The dodgy scams and online brokers fleecing hundreds of millions make it ripe for tight regulation
According to the Federal Trade Commission, more than 46,000 people have lost over $1 billion in digital currency to scammers. It can't be long before governments get involved.
Will it be banned?
China tried to ban crypto trading in 2021. Garry Gensler, chairman of the U.S. Securities and Exchange Commission, thinks crypto assets are security tokens and they should be regulated like the investment products he believes them to be.
Or will countries take the UK's approach and choose not to regulate them? Or will they go even further like El Salvador and make them official currencies?
Almost any form of regulation will make crypto essentially unusable and therefore denude it of its apparent intrinsic value. But widespread adoption of cryptocurrency will be chaotic anyway because, in comparison to fiat currencies, using them to make and receive payments is painfully slow.
Although blockchain technology with its sexy decentralized apps is built to be safe, it's not unbreakable. And standard finance with its boring old centralized exchange is heavily regulated with a mountain of regulations and regulators to protect consumers. I know where I'd take the risk.
Will government take it for their own?
I find it hard to believe that governments around the world will be willing to sacrifice control over their monopoly to issue and supply money. However, the momentum behind crypto might be such that instead of trying to kill it, they'll just take it.
China has talked about creating blockchain-based cryptocurrencies (so-called central bank digital currencies) as have the Bank of England.
It's way too early to say for definite but cryptocurrencies are probably a very clever and well-meaning vehicle for citizens to exert their right to trade with each other without being subject to the whims of central bankers and politicians whose actions erode the value of money over time.
But the market is too volatile, payments take too long to process, it could be killed overnight by governments and it attracts hucksters of the very worst kind.
So for now, I'll pass. And did I mention it's bad for the environment?