Why I Won’t Be Investing in Bitcoins

In the current market manias, investing in Bitcoins or other cryptocurrencies is a popular thing to do. Who could lose money on Bitcoins that seem to be on an unstoppable upward trajectory? Well a lot of people can. It was down 8% yesterday in sterling terms as I was writing this and it has been both very volatile and on a downtrend since the start of the year.

Apart from those folks who like to gamble on a throw of the dice or on the turn of a card, why would anyone “invest” in it? I suggest nobody because there is no fundamental value underlying the asset. That’s apart from the security issues and people just losing their passwords and hence being locked out of the asset.

If you buy shares in a company, you are actually purchasing part ownership of a business. That business will be producing something that people actually want, such as products or services they wish to consume. So long as people, or other businesses, have an urgent need for what a company produces then they will pay for it (typically by exchanging their labour or productive capacity (assets) using currency as a means of exchange). It is possible that Bitcoins might in future be that means of exchange but it is not ideally suited to that purpose.

The value of assets in the modern world is not identified by reference to gold or other physical assets and central Banks can print money whenever they wish. So there is no intrinsic value in cash holdings. The value is not limited by supply, and even with Bitcoins, more can be produced (albeit at enormous environmental cost because of the electricity consumed to do so).

When you buy a share in a company, you are purchasing a small part of a business that produces something useful. When you buy a Bitcoin all you are purchasing is a token to sell to someone else at a higher price – if you are lucky and can persuade them it has some value.

What’s the difference between Bitcoins and Gold you may ask? The majority of gold is not mined for just keeping in a bank vault or converting into coins. Some 50% is used in the production of jewelry and 37% in electronics. In other words, there are applications for it that are well established and consistent demand. Yes there is some speculation in gold and some uses of it as a simple store of value but the mining of gold would be sustained by industrial applications. You can actually wear gold jewelry to impress people with your wealth (just like people buy expensive cars and watches), but you cannot wear Bitcoins. All you can do is to go around boasting about how many you hold but that is not quite as effective as wearing gold.

The Financial Conduct Authority (FCA) has recently warned against speculation in cryptocurrencies by retail investors, and quite rightly. There is no intrinsic value in a Bitcoin. With company shares the intrinsic value may be somewhat uncertain and share prices subject to the emotions of investors but there is at least a way to determine the value by looking at the discounted cash flows generated by a company. The future cash flows help you to determine the current value. But with cryptocurrencies there are no associated cash flows. No dividends paid out and no profits generated directly from the assets as with company shares.

If you buy cryptocurrencies you are simply buying a “pig in a poke”.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Damning Treasury Report on Crypto-Assets

Thinking of investing in some Bitcoins or other Crypto-Currencies? Or perhaps I should have said thinking of speculating in them. Best first read the report published today by Parliament’s Treasury Committee. It’s a damning attack on the “wild-west” of this new market and calls for it to be regulated by the FCA as soon as possible.

Their report suggests that most crypto-currencies has used mainly for speculation and they say there is minimal consumer protection.

The report also puts a damper on the alleged wonders of blockchain technology with the Bank of England arguing to the Committee that it does not function well as a means of payment because it cannot handle the payment volumes required, plus it’s too slow and too expensive to meet even current UK payment transaction volumes. It also consumes large amounts of power.

They examine the price volatility of crypto-currencies and the problems associated with them – namely the vulnerability of the exchanges and client holdings to hacking, the potential for market manipulation and the use of crypto-currencies for money laundering and other criminal activities. Crypto-asset markets fall outside the market abuse rules so anything goes in essence, and Initial coin offerings (ICOs) are in a regulatory loophole so are open to abuse.

A bitcoin was worth $20 in January 2013, and reached $19,206 in December 2017 but is now back down to below $7,000. Extreme volatility and even illiquidity seem to be features of crypto-currency markets even in the more widely used ones.

Comment: It is very clear that crypto-currencies and ICOs are promoted as “get rich quick” products mainly to part fools from their money – in other words it’s the same old story of financial innovation being exploited to seduce suckers. There may be some merit in establishing a digital currency that is independent of banks and that cannot be corrupted by Government. But the lack of regulation leaves it wide open to abuse and use for criminal activities. Regulation needs to be introduced as soon as possible to introduce proper controls on those operating exchanges or performing ICOs and there obviously need to be better audit trails and anti-money laundering controls to remove the criminal elements.

The FCA may have been reluctant to take on responsibility for this new area as they barely have the resources to do their job properly at present. But if the resources cannot be made available, or are unjustifiable, then the UK Government should consider banning crypto-currency trading, exchanges and initial coin offerings as in China. If it can’t be regulated it should be banned.

As regards blockchain technology, it might have an advantageous use in some applications but it hardly looks likely to be the wonder drug for electronic accounting as some seem to believe. Too much hype and not enough evidence of real applications where it provides cost benefits as yet.

The Treasury Committee Report is available from here: https://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news-parliament-2017/digital-currencies-report-pubished-17-19/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Want to Get Rich Quickly?

Do you sincerely want to be rich? That was the sales slogan used by fraudster Bernie Cornfeld which attracted many. Or perhaps even better, do you want to sincerely get rich quickly? That is in essence the sales pitch used by many promoters of CFDs (Contracts for Difference).

CFDs are geared investments in stock market shares, bitcoins, commodities or any volatile instrument where you can magnify your profits many times. Or of course magnify your losses. You can, to put it simply, lose all your money and very quickly. Last week the Financial Conduct Authority (FCA) wrote a stern letter to CFD distributors saying in essence that their review revealed substantial failings in the rules that they should have been following.

CFD products are complex and risky and are not suitable for inexperienced or unsophisticated investors. But 76% of retail customers for CFDs lost money in the year to June 2016 according to the FCA which clearly indicates that there are plenty of suckers out there who are being exploited. One of the many problems that the FCA discovered was inadequate client qualification with many relying on broad descriptions of “sophisticated” and “financially literate”. Indeed, they often relied solely on the client’s words about their knowledge and experience and their qualification to be classed as “elective professional” clients which effectively relieves the seller of any responsibility for the advice they give.

This problem extends not just to CFD providers but historically has been a big problem in the promotion of shares in unlisted companies, the small cap companies listed on AIM and in some overseas markets. If reliance is placed on what the client says about their competence and ability, it’s rather like asking a motorist whether they are a good driver – they will all say yes.

In essence there surely needs to be a better way to tackle this issue. If that cannot be devised then the FCA is likely to get much tougher in policing the market for CFDs.

But the FCA should not be too concerned. If those who speculate in CFDs lose the ability to do so, they’ll just move onto something else like trading in bitcoins or forex – and there are lots of promoters of those around. The problem really comes down to basic financial education. Folks need to learn at an early age that there are no quick ways to get rich. If they do not then they will fall for the latest scam regardless of the actions of regulators.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.