In my second column, I will focus on one of the most topical issues for financial professionals, namely crypto. People widely refer to cryptocurrency, but crypto assets seems to be the term more frequently used today. I have combined these two terms into what I call CryptoMania, as per the title of my book on the subject matter.
I launched CryptoMania on 1 April 2018 (April Fool’s Day) as the only independent book on Amazon about crypto, with a view on both sides of the coin, and I believe it is still the case today. Although I will refer in my column to Bitcoin only, it would have relevance to all altcoins (alternative coins), as Bitcoin is the mother coin. I am not going into the history of Bitcoin and will instead focus on the principles and future of Bitcoin and crypto as I observe it.
The whitepaper on Bitcoin always designed it as a cryptocurrency with a restricted supply of Bitcoin of 21-million. Why is Bitcoin being used as a crypto asset with no intrinsic value and not primarily as a cryptocurrency? This is where I believe a severe fault line is developing within the crypto industry. When something designed for one use is being abused for another purpose, questions must be asked.
When Bitcoin is not used as a currency by most holders but as a speculative asset, we should not be surprised by its volatility and regular crashes. Over the last ten years since it launched, we have seen 15 significant hits above 30%, with four at 50% plus and three above 80% plus. We are busy with number 16 as I write this column. Over the last 10 years, it has only not crashed in three years. We all know a currency requires stability, which is not the case with Bitcoin, but also not with any of the 19 000 plus alternative coins, including the so-called Stable Coin, which was supposed to peg against the dollar.
If Bitcoin as an asset class has no intrinsic value, why is not only the herd climbing into Bitcoin but also significant institutions? It is a case of fear of missing out (FOMO), as we often see when it comes to investment opportunities. It brings me to the greater fool theory that argues that prices go up because people can sell overpriced assets to a “greater fool”, whether or not they are overvalued. That is, of course, until there are no greater fools left, which is not the case yet with Bitcoin, but we see it happening with many alternative coins regularly.
According to the greater fool theory, investing means ignoring due diligence on valuations and other relevant data. It means people subscribing to the greater fool theory could be left holding the bag after a correction, as we are currently observing again. I launched my book on April Fool’s Day for a reason, to make a point.
If bitcoin as an asset class has no intrinsic value, why is not only the herd climbing into Bitcoin but also significant institutions?
I, for one, believe there is a considerable future for crypto if used as a currency. It may just be the Internet of 25 years ago. There may even be a future for Bitcoin as an asset, but then someone or the investment industry must find a value for it to be used as an asset class. I believe blockchain has a much bigger future. Remember that blockchain does not need Bitcoin, but Bitcoin needs blockchain to prevent double transactions. However, the blockchain technology brand is used to manipulate the herd to buy crypto.
As financial professionals, we must be aware that we are not allowed to advise on unregulated products, and I believe the reason the Financial Sector Conduct Authority (FSCA), as well as many global regulatory bodies and governments, are looking at regulations for crypto. As Bitcoin has been designed to be decentralised and operate unregulated, interference by regulators will cause another crypto fault line in the future with disastrous consequences for the crypto herd, which the crypto whales are manipulating. My complimentary book with all the detail you, as an advisor, requires to have conversations with clients and investors can be downloaded from Blue Chip Digital at www.bluechipdigital.co.za
Column by Kobus Kleyn, CFP®, Tax and Fiduciary Practitioner, Kainos Wealth.
Kobus Kleyn has published over 200 articles and authored three books. He is a multiple award-winning professional and holds eight memberships with professional associations.His most recent awards were lifetime achievements awards from the FPI (Harry Brews), The Million Dollar Round Table (Top of the Table Life Membership) and Liberty Group (Life Membership) in 2021/22.