It’s a great story – young, poor boy outperforms other children who are accustomed to success by unconventional means, to end up with the ultimate prize and a vast fortune. Whether you’re a fan of the old Gene Wilder version or the newer remake, or you grew up with a tattered copy of Charlie and the Chocolate Factory on the bookshelf, there’s no denying the story at the heart of it is a feel-good favourite for the generations.
Unfortunately, reality does not follow these rules in regard to favouring the plucky underdog. An example of this we can watch unfolding right before our eyes is the rise of crypto, marketed as essentially the anti-currency existing outside of governed control.
Cryptocurrency as we know it likely starts with the founding of bitcoin in 2009. Bitcoin’s whitepaper outlined the concept of blockchain technology for the first time, thereafter prompting the launch of a slew of competitor currencies. This was directly after the 2008 financial crash, so it’s understandable that a currency designed to circumvent traditional banking infrastructure would be appealing – and it could be that trends in anti-establishment sentiment, particularly in Europe and the USA, are keeping this appeal alive despite huge price fluctuations of late.[i]
New Zealand remains below the global average when it comes to cryptocurrency trading, with only 6.8 per cent of respondents saying they owned crypto in Finder’s April 2022 index. The global average in the same period was 14.6 per cent. [ii]
Proponents of cryptocurrency tend to focus on the separation it has from traditional stocks and currency – it’s accessible 24/7, how it’s theoretically uncorrelated with stocks (though recent evidence increasingly suggests otherwise), and how it’s not governed by any central body.[iii]
Of course, the same list works against cryptocurrency. It’s accessible, sure - but it’s also susceptible to hacking. The second biggest crypto hack ever took US $600m worth of Ether from Ronin Network just last month, which is even larger than the infamous $460m hack that bankrupted Mt Gox seven years ago. There’s also been a rise in fake crypto, which targets unknowing investors to put their money into currencies that don’t exist (even digitally). There’s even a significant risk of forgetting your password and losing your investment that way.[iv]
In terms of governance… well, if Willy Wonka had more oversight than just the Oompa Loompas in the factory, the competition’s losers may not have gone home in such terrible states. The lack of regulation around cryptocurrency means that on top of it being hugely volatile, should the currency trader or the company itself get hacked or go broke – there’s nothing to hold them accountable for the millions they could (and sometimes do) lose. It’s not even clear in many cases who is behind the exchange.
Crypto operates on the greater fool theory. Because it has little real world use currently, investors are buying it on the premise that they will be able to find someone down the line willing to buy it off them – the greater fool, or some optimist who believes they have found their own golden ticket.
Some people will get rich like this. But they will be the exceptions, not the rule – and it’s best not to gamble your hard-earned money on being an exception. If you’re willing to risk it all… you’d best be prepared to lose it all.
Of course, some portfolios with crypto included will tick along as normal. But this will likely be due to diversity. Putting all your eggs in one basket – crypto or other – is neither wise nor relaxing. You’ll find yourself watching the basket constantly in case it falls, and when it does, you might not have enough invested in other areas to soften the blow.
If the appeal of being separate to the markets is what beckons, think again – in late 2021 and into mid-2022, bitcoin prices rose and fell similarly to higher risk or single sector equity prices. The price correlation with equity suggests that when crypto is treated like stocks (as it is now, because there are very few practical applications for spending it) it starts acting like… well… stocks, only more volatile.
Volatility references the amount of risk or uncertainty associated with a security’s value. If you’re looking at the volatility of certain assets, you’re looking at how largely the prices swing up or down around the mean price. Bitcoin and other cryptocurrencies are notoriously volatile, meaning they would typically be considered high risk investments.
High risk is usually tempered by time. If you have time on your side, you can ride out more ups and downs than someone who is planning to use their wealth in the next few years. Someone planning to buy a house next year would likely want their money in a lower risk situation, whereas someone who is retiring in 40 years could handle a few speedbumps along the way.
Similarly, you wouldn’t want to be sinking your savings into bitcoin or the like as a get-rich-quick scheme. You may as well take it down to the track and bet on the horses or the hounds – at least one of them must win in every race, and you’ll have a fun time with your friends.
There’s unfortunately no golden ticket in investing. If someone tries to sell you one… run.
For a well-built, diverse portfolio and a plan that works for your current situation and future goals, you’re always best to start with a chat to a trusted financial adviser.
· Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.investopedia.com/tech/were-there-cryptocurrencies-bitcoin/
https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp
https://doi.org/10.17645/pag.v9i3.3949
[ii] https://www.finder.com/nz/finder-cryptocurrency-adoption-index#:~:text=Bitcoin%20adoption%20in%20New%20Zealand,%25%20from%2050.8%25%20in%20January.
[iii] https://money.usnews.com/investing/cryptocurrency/articles/is-bitcoin-worth-investing-in
[iv] https://www.forbes.com/sites/jonathanponciano/2022/03/29/second-biggest-crypto-hack-ever-600-million-in-ethereum-stolen-from-nft-gaming-blockchain/?sh=36ac3b312686
https://www.fma.govt.nz/investors/ways-to-invest/cryptocurrencies/
