Should you invest in cryptocurrencies?

Today’s column gives way to an article written by my CFA son, Enrique, in answer to a reader’s question.

Question

Hi Ms Rose. What is your take on cryptocurrencies? I work in a bank and know that the BSP does not endorse these, as these are unregulated and risky. I’ve seen some people earn much from cryptocurrencies and sometimes, I am tempted to invest. My investments are money market, equities, balanced fund, all under uitfs, and I do not want to risk losing money I worked hard for. 

Thank you for your valuable insights.

Jenny F  (via email)

Answer from Enrique

Hi Jenny,

It’s great that you have already diversified your investments across different asset classes and you’re now looking to learn more about this new investment called cryptocurrencies. It’s good to study something first before placing any of your hard-earned money. 

I will try my best to explain cryptocurrencies, with a focus on the most popular one, bitcoin, through a series of Q&A’s that I hope can simplify the discussion and clearly present the pros and cons so you can make a better decision for your hard-earned money.

Who should be considering investing in bitcoin?

Before getting into the details, I think you should only consider buying bitcoin or other cryptocurrencies if you are:

1. Willing to do research and learn
2. Willing to experiment and possibly lose all your capital
3. Have a surplus of savings and an emergency fund

In other words, if you are simply a bandwagoner feeling FOMO, not willing to spend time to research, or do not have enough emergency funds, then you are better off NOT bothering with bitcoin or any cryptocurrency for that matter.

If you or the readers joining our conversation now can confidently say yes to all three and want to take the plunge, read on.

What is bitcoin?

Bitcoin is a cryptocurrency (“crypto”) or digital currency that can be used to buy or sell goods and services. Think of it like arcade tokens wherein you exchange your Philippine pesos to load up your arcade card to access your favorite games. 

How does bitcoin work?

Bitcoin and other cryptos are based on a fascinating new technology called blockchain, which acts as an online ledger for all transactions done with bitcoin. Blockchain is a decentralized technology spread across many computers.

Let’s explain this through an analogy.

Think of the blockchain technology like a shared Google Doc in contrast to a Microsoft Word. For group projects a few decades ago, you would write your part in a Microsoft Word document then send it to another groupmate so they can do theirs. If you wanted to change something you earlier wrote, you had to wait for your groupmate to send the file back to you or else you will mix up the different versions of the same document. 

In contrast, blockchain works more like a Google Doc wherein all of your groupmates simultaneously see just one online version of the document, in bitcoin’s case, one online ledger of transactions. Any edit done by any groupmate will be seen by everyone so there is no need for sending anything back and forth.

Why should you consider buying bitcoin?

As with any new technology, there will always be two opposing views whether or not it will be the next technological revolution like the internet or will simply be another failed experiment. From the many reasons talked about, these appear to be most sensible in support FOR buying bitcoin:

1. Rising acceptance and adoption – as a digital currency, one can argue that the value of bitcoin may rise as more companies and individuals use it. Some companies that have expressed plans or are slowly integrating bitcoin include Home Depot, BMW, Tesla, AT&T, JP Morgan and even local bank UnionBank.

2. Need for an alternative storehold of wealth – after the pandemic ravaged the world’s economies, central banks (including our Bangko Sentral ng Pilipinas) have resorted to money printing which lower the value of traditional currencies and bring about record low interest rates. Investors are now looking for other places to retain the value of their wealth.

3. Global accessibility – compared to other storeholds of wealth (gold, art, real estate) and to some extent even traditional stocks and bonds, bitcoin and other cryptos have become easily accessible to anyone with a decent internet connection. These can be easily purchased even in small amounts, exchanged, and accessed globally with the numerous crypto exchanges and wallets sprouting all around the world.

Why should you NOT consider buying bitcoin?

On the flipside, there are serious risks to consider which could lead to bitcoin amounting to less than it does today.

1. Non-income producing – great investors such as Warren Buffet (and his partner Charlie Munger) deem bitcoin and other cryptos as having no value as they do not produce any income unlike stocks that generate profits and bonds that pay interest.

2. Highly speculative and volatile – though bitcoin has a 10-year history under its belt, the price has fluctuated wildly and it appears that a large share of bitcoin supply is mainly held by speculators engaged in short-term trading (as compared to long-term investors storing savings or large institutions storing reserves). There is also a chance that a new crypto could later dethrone bitcoin, making bitcoin less relevant.

3. Regulatory uncertainty – it is possible that governments could clamp down on the use of bitcoin and other cryptos if these undermine traditional currencies or become avenues for money laundering activities. 

Conclusion: What does this non-expert think?

I have to be honest that I am no cryptocurrency expert, but I have researched about it and part of that study is to invest just a little in it.

I hope that by now you know a little bit more about cryptocurrencies to help you decide whether or not you will experiment by adding this exciting yet very risky new asset class to your portfolio. Overall, it is still quite “young” compared to your more traditional investments, so I would always err on the side of caution.

Remember to continue doing research and learning more about this before diving in. As with any new risky investment, be sure to allot only an amount that you are willing to lose. If you already understand what bitcoin is and you’re completely certain that you want to invest in it, you can try putting in just 1% of your portfolio, but please don’t go beyond 5%. smiley

Curious to learn more about this? Join us on our ThursDate on Kumu at 11 a.m. It will be an interesting discussion. 

ANNOUNCEMENTS

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