Bitcoin investors may have the illusion that they are guaranteed quick and easy profits

From Vernon Pillay August 18, 2021

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Investing in cryptocurrencies like Bitcoin is similar to playing the lottery and investors need to be careful when adding speculative asset classes to their portfolio.

The cryptocurrency has largely escaped regulation so far as its popularity continues to attract huge speculative investments on its price ($ 1.7 trillion so far) in hopes of quick fortune. Those days seem numbered, however, as governments around the world, including South Africa, seek to regulate this largely unconventional asset class.

This is according to Saliegh Salaam, portfolio manager at Old Mutual Investment Group, who says there are many parallels between cryptocurrency and lottery games. Referring to a recent article by Bloomberg columnist David Finkle, entitled “What Made Us Venice of the 16th

“Just like the lottery or house-winning game of chance, cryptocurrency buyers have a chance to win big, and some investors have benefited amply from their Bitcoin acquisition,” Salaam says. “However, as with any game of chance, there is a greater likelihood that investors could lose their money.”

Bitcoin is a digital currency that is fully online, has a set offer, and runs on a technology called blockchain. It is one of the types of cryptocurrency out there today.

The supervisory authorities also take note; US Treasury Secretary Janet Yellen warned of the dangers Bitcoin poses to both investors and the public, calling it a “highly speculative asset that is extremely volatile”.

Salaam says it is this volatility of cryptocurrencies that can lead to financial losses. “Since 2013 we have seen that the price can rise by hundreds of percent and also fall again within a very short time, which makes it very difficult to predict it or use it as a transaction tool.”

“While there are many long-term Bitcoin holders who believe that it will take time to set up as a transaction method and a store of value method, many who are now exploring do so under the illusion that they are guaranteed quick and easy profits. “Says Salaam.

Short-term investors see the price rise and buy in with the expectation that profits will continue for some time, with the aim of taking advantage of the higher price when selling. This susceptibility to speculation and even market manipulation catches the unwary investor.

In addition to the volatility, there remains a lot of uncertainty regarding the cryptocurrency. After more than a decade, hackers still have concerns about the security of the technology. and the energy-intensive effects of cryptocurrency mining.

Salaam says expert opinion on whether cryptocurrency qualifies as a new asset class fluctuates widely as its underlying value cannot be quantified. “Take investment in art as an example. The work of art has intrinsic value to the person buying it, but it has no income or cash flow for the investor. In a way, crypto falls into this camp, it doesn’t offer rental income or dividends. While some argue that it doesn’t give you your money back, others argue that, like art, it has perceived value. “

The big advantage of cryptocurrency is that the blockchain technology that underpins its perceived value will continue to exist. In June, El Salvador, which used the US dollar as its currency more than 20 years ago, became the first country in the world to pass a law allowing the use of Bitcoin in every transaction. It is unlikely that this step will take hold in the near future; it indicates that blockchain technology has immense potential for transactional applications.

American billionaire and investor Ray Dalio earlier this year praised the Bitcoin-led revolution as a feat of technological genius, but admitted that cryptocurrency “looks like a long-term option for a highly unknown future in which I could invest an amount of money I would “I don’t mind losing about 80% of that.”

Most importantly, Salaam says that investors must do adequate research to ensure they fully understand the investments they are making.

“Those considering crypto need to make sure they are not being scammed by the many websites and people trying to sell bitcoin investments. Always go through reputable companies and get in-depth advice on your investment portfolio. Cryptocurrency can be part of your long-term investment mix, but relying on it for short-term greed for profit can result in significant losses. “

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