Nearly everywhere you go, people of all demographics – old, young, high rollers, office workers, labourers –are all talking about investing, whether it be in shares or cryptocurrency.
This is because they are looking for somewhere to put their money thanks to low returns available from bank savings accounts caused by the Reserve Bank driving down interest rates to stimulate the economy by getting people to spend more.
For many, the alternative to a savings account is investing in something that will bring a better return than 1.2% or so available on three-year terms, even if with that investment comes more risk.
A recent study shows close to 40% of participants are using or plan to use micro investing platforms (where you invest small amounts of money regularly) such as Sharesies, Hatch and Stake, which offer services including managed fund investments. It’s been estimated around 55% of Generation Y (39 years old or less) are using them or are likely to.
Mix with this the curiosity of looking at cryptocurrency, which has had high (and low) fluctuations, and for the first time in a generation we have people who wouldn’t normally be investors now looking at opportunities and entering conversations at sports events, in bars, and around the barbie with a level of excitement.
Don’t get me wrong. Talking about investing is a great thing but how many people understand how to read a company’s balance sheet or even understand the basics of cryptocurrency. Not many, I suggest.
So what’s the difference between shares and cryptocurrency?
When you buy a share or stock, you’re investing in a particular company you believe will continue to grow in the future. You may have a connection with them through someone you know or who works there, you may like and use their products and know the world wants more of them, or they promote your values, such as sustainability.
Cryptocurrencies are nothing like that. You buy tokens of a particular currency to use them as a form of payment, or you might just hold on to them in the hope they increase in value – often just because of their popularity and how much other people want them. There’s nothing you can do to increase their value. You’re not relying on smart CEOs, you’re relying on luck and hope to a certain extent.
So what is cryptocurrency?
It’s a class of asset designed to create a digital currency through advanced cryptography, which protects information and communications through the use of codes, so only certain people can read and process it.
There are a handful of cryptocurrencies, and Bitcoin is by far the most popular.
Bitcoin was started in 2008 when a programmer using the pseudonym Satoshi Nakamoto published a paper discussing the technology and code needed to enable the cryptocurrency. He described the process of “mining,” which creates a supply of Bitcoins.
Each Bitcoin is a computer file stored in a ‘digital wallet’ app on a smartphone or computer. You can send Bitcoins (or part of one) to your digital wallet, or you can send them to other people. Each single transaction is recorded in a public list called the Blockchain, which is the underlying technology that powers digital ledgers that can be shared over public or private networks and tracks transactions.
A computer mines Bitcoins using algorithms that solve a series of calculations. These time-consuming computations verify Bitcoins and allow for the creation of new ones. Only 21 million Bitcoins can be mined, and they become more time consuming to create as the supply grows. As you can see it’s not a bricks and mortar investment, and it is quite complex to understand.
There’s no doubt investors have made significant gains using it. But they have also made significant losses. It’s human nature to want to get onto a winner and it’s difficult to ignore an asset that has gained more than 500,000% in just a few years.
So why does it seem to be so volatile?
Here are some recent movements:
- On April 17 this year, Bitcoin experienced a sharp decrease, falling nearly 14% in an hour before rebounding. It is thought the plunge was due to unconfirmed internet rumours that US authorities were going to crack down on money laundering involving cryptocurrencies.
- A few days before this, Bitcoin and other cryptocurrencies rose as the trading platform Coinbase went public, attracting an $86 billion valuation.
- Tweets from well-known business leaders have contributed to Bitcoin’s price volatility. A recent example is Tesla CEO Elon Musk pledging in February to accept Bitcoin as payment for Tesla vehicles. This sent cryptocurrency soaring. In May he reversed this pledge, triggering a slide.
Its volatility is such that Bitcoin rose from $US5,000 ($NZ7,100) in March last year to nearly $63,000 ($NZ90,000) in April this year. It then plummeted to $US31,000 ($NZ45,000), and has settled around $US33,000 in recent weeks.
History tells us investment in Bitcoin involves an element of FOMO (Fear of Missing Out), especially where you hear stories of how much money people have made on Bitcoin and other cryptocurrency.
I know from my own friends and family that many people are actively investing in cryptocurrency.
I’m still standing on the side-line – my risk tolerance is pretty conservative and I’m on my own financial journey – but for some people, FOMO is too great, and their risk tolerance may allow some consideration.
If that’s you, then you should take the time-honoured advice of investing: tread carefully and be aware of the risks. These include: cryptocurrency supply is limited, it can be mined using only power-hungry computer systems that crunch algorithms, it’s not a store of stable value, it doesn’t accumulate interest, and governments are making its use more difficult and may move to regulate it.
I’m a firm believer if you don’t fully understand something then you should seek advice. In the words of my financial adviser “you just don’t need to take the risk that crypto represents. It’s unregulated and who is to say that you will ever be able to spend it on handbags or shoes. Better to invest elsewhere and be sure.” As always, my financial adviser has a good point – that’s made me pause.