Investing in Cryptocurrency?

During my time as an adviser, I must have seen just about every ‘investment fad’ known to mankind. There were Jojoba beans, Aloe Vera plantations, acres and acres of sustainable forestry schemes, and of course, a plethora of property spruikers, to name just a few.

A particular favorite of mine was ‘The great Ostrich boom’ from around the turn of this century. Back then, unbeknownst to the majority of the population, it seemed that Ostriches were destined to become the great saviors of humanity.

Not only could the meat from a single Ostrich provide more protein than a hundred chickens they were also capable of producing some very lucrative by-products.

Ostrich leather for one, a mainstay of the high-end shoe and handbag manufacturer. And of course, there was the luxurious Ostrich plumage. A godsend to the burgeoning millinery industry!

Through the Ostrich it seemed, humanity was about to strike a rich’ vein’ of exclusive handbags, race day hats and the largest southern fried drumsticks imaginable.

And as a result, the humble Ostrich was also destined to become a veritable ‘cash cow’, providing the astute investor, a very lucrative ground floor opportunity.

And so the seeds of the great ‘Ostrich Boom’ were well and truly sown.

Which was the reason I was suddenly confronted with a steady stream of would-be investors, all requiring the imprimatur of an investment professional. Or so I thought.

Now apart from the occasional indoor marijuana crop, the region where I practiced could not be considered agricultural by any stretch of the imagination. Therefore, I possessed little in the way of useful knowledge to guide any investor through the intricacies of primary production.

In fact, I would go as far as suggesting my knowledge was somewhat on the negative side of zero. So I was all but useless giving advice to this new breed of ostrich farmer.

But I was soon to discover that prospective investors, weren’t actually seeking my investment expertise after all. For them, Ostrich investment was already a fait accompli. Rather it was a case of them trying to convince me, of the merits of Ostrich farming and its unique investment potential. It was as if I represented the old way, and their job was to enlighten me, about this new, modern method of investment.

And I can assure you, they didn’t take kindly to any of my negativity either “You really do need to have a vision of the future’ I was told at the merest utterance of the word ‘but’!

Coincidentally, it would seem that all ‘fad’ investors have an uncanny ability to visualize the future. And needless to say, it’s always a future abundant with their chosen investment.

Actually, I did have a vision of the future but it certainly didn’t include an ostrich, that’s for sure!

Anyway, history now records Ostrich farming for what it was – just another investment fad littering the ‘road to riches’.

And just like all the other ‘fads’, there were lots of investors who had hopped on the gravy train, only to forget to hop off. Mistakenly believing they were riding all the way to the ‘promised land’.

Unfortunately because of the very uniqueness of a ‘fad investment’, once ‘burst’, they never recover, no matter how much time you give them.

The “time in the market” ethos, so popular with market pundits, is no help to the poor investor who buys into a fad, just prior to the price collapsing.

“The four most dangerous words in investing are: ‘this time it’s different.’” – Sir John Templeton

But Bitcoin isn’t an Ostrich, I’m investing in a Cryptocurrency!

Recently, I’ve taken quite a lot of notice of the flurry of interest surrounding Bitcoin. The digital world has certainly spawned lot’s of innovation, so it would be stupid to think that ‘value-exchange’ mechanisms should be spared. But rather than Bitcoin’s revolutionary effect on global commerce catching my interest, it has been the huge speculative bubble surrounding it.

Now, I for one must admit to having no real idea about Bitcoin apart from its meteoric rise in value. The fact it has turned some astute ground floor investors into millionaires and in a few cases, billionaires, was certainly enough to peak my interest.

And I must say, after conducting my own research I was starting to believe the hype surrounding the new age of ‘value exchange’ and its associated ‘blockchain’ technology. Times are changing and doing so at lightning speed. So why shouldn’t our concepts of currency change?

Ironically though, from a pure investment perspective, currency trading is probably one of the most complex of trades. I even recall reading a passage from a Dummies book on the very subject, suggesting that currency speculation was certainly not for the faint of heart.

In this arena, traders normally look at currency pairs to extract profit, waiting for a rise or fall in one to alter the price of the other. It’s certainly an investment that measures long-term positions in minutes and the vast majority of market participants trade rather than invests.

But cryptocurrencies, like Bitcoin, on the other hand, are different. They don’t represent value; but rather, it is them that are being valued.

And unlike any other currency on the planet, Bitcoin totally lacks Government or bank intervention. So rather than being issued by a central authority, Bitcoins creation is undertaken by anyone with enough computing power to solve a series of complex mathematical problems. This so-called ‘mining’ process is, however highly wasteful, utilizing extraordinary amounts of energy to achieve an outcome. Which is for me, the fatal floor of the whole Bitcoin concept.

Now, throw in some explosive price action and a willing media, keen to extoll the amounts of money being made by everyday investors, and we have all the ingredients of a classic ‘investment fad’.

Oh, and don’t be fooled by the arguments of respectability as a result of institutions joining the boom. Large financial institutions have a long and miserable history of jumping on any bandwagon that makes them money. And they too are usually taken for the same ride as ordinary punters.

For example, during the ‘dot-com boom,‘ I remember two very large fund managers, attempting to address customer demand by releasing technology funds in February of 2000. Only to have the market crash in May of the same year, wiping out 80% of their investor’s money!

And although not so much a fad, I just love the predictive powers of the Royal Bank of Scotland’s senior analyst, who made headlines early in 2016, imploring everyone to ‘just sell everything’ as a result of cataclysmic economic events he was predicting. Ahem, bad call I think!

I can assure you, there are countless examples of failed institutional involvement with investment fads to draw from. Just check out the lending boom leading to the GFC for starters, or how high some institutional analysts were predicting the gold price to get!

Remember, where there’s money to be made, there will always be an institution. And behind every institution, sits an executive with limited time and a short-term incentive bonus that needs to be achieved.

But the real piece de resistance for me indicating a Bitcoin fad was actually a recent press article. According to the report a “pole dance fitness instructor” had recently made a $5,000 profit trading in Bitcoin. She is now considering giving up her chosen career so as to trade fulltime and is also keen to offer advice to others eager to join the ranks of Bitcoin investors.

According to her reckoning “Bitcoin is the future”. Need I say any more? Mmmm I’m sure that’s Ostrich I smell cooking!

Thank you for reading and see you next time. Homepage

Postscript

5/2/19 Read this article to get a picture of the craziness created by the boom in crypto investing.