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Should financial advisers recommend cryptocurrencies? No — for a start, SA financial regulations don’t allow them to do so. But there are other ways to provide advice. “We can’t advise you to invest in cryptos so it will have to be your decision,” is how some financial advisers protect their backs. They then give an opinion that is tantamount to providing advice.

So what should financial advisers know about cryptos before even considering giving a nod or a wink? They should know that acceptance of cryptocurrencies is based upon a collective belief — another name for a faith. Like all faiths, it is a religion. This can result in zealots pouring huge amounts of capital into cryptos while keeping them blind to evidence that undermines their ideology.

Some people have drawn a comparison between gold and crypto currencies; there is even a saying that gold was the first of the cryptocurrencies. But while there may be similarities, there are also differences. Gold has industrial uses, with about half of annual production used for jewellery, 10% going to industrial applications and the remainder acquired for central bank reserves. It acts as a store of value while remaining untethered from modern currency. 

Gold is difficult to mine, and when it appeared in the form of glistening jewellery, bars and coin, it became a desirable cosmetic product and a means of transferring value. It was a slow process, not in terms of months or years, but of centuries. Eventually, gold became a carrier of wealth, as evidenced by the masses of gold stored by countries in vaults and in people’s safes at home worldwide, and even as ornaments around people’s necks and wrists.

Like gold, cryptos are difficult and expensive to “mine” and involve huge amounts of complex technology. Once mined, they are sold by the miner but are owned and held in the web; to transfer ownership of a crypto you need a computer and a barrage of complex formulas; to give away gold you can hand over a coin or a necklace.

Cryptos don’t have industrial or cosmetic use; they are not stored by governments; they are not found on people’s necks but in complex mathematical formulas in the technology web.

To use your crypto to pay for your pint of lager you would have to stand in line fiddling with your cellphone and keep people behind you waiting for 10 minutes while you did so. Barmen wouldn’t like it. Hard cash, a cellphone app or a credit card are far more user-friendly.

For cryptos to become like gold, and to become an investable product, they should be tested against the following criteria:

  • Belief in the crypto must be widespread — many people must share the faith, on a global scale. To give this an actual figure is as difficult as establishing how many people believe in the Jewish, Christian, Muslim or Hindu faiths. That there are many such believers in each religion is self-evident and for the believer it bolsters the belief in the validity of their religion. Many people globally accept that gold is a valuable commodity; they have done so for centuries, longer even than current major religious systems have been around; and believers in gold don’t need to be persuaded that holding gold has proved to be a beneficial investment.
  • It must have been so for a long time. The major religious systems are rooted in centuries and are so inbred in many national consciousnesses that it would be difficult, if not impossible, to eradicate them. Antireligious propaganda and attempts to destroy belief systems have proved repeatedly to be a dismal failure, and counterproductive.
  • It should have shown that it has benefited crypto investors by giving them satisfactory returns. Religions have an advantage over cryptos because the benefit of religion is to be found in the “afterlife” and that, by definition, cannot be verified. If the many people who invest in cryptos lost money, additional investors will be difficult to find. Of course, if a sufficiently large number of people make money from investing in cryptocurrencies, as the propagators of the currency assert, this will encourage further investors to buy into it. 

Do cryptocurrencies meet these criteria? Bitcoin was launched on January 1 2009, which compared with established religious systems means it is but a babe in arms. Cryptos are believed in by a growing number of people worldwide, but the crypto deniers are probably still in the majority. Many people claim to have made money from the currency, but there are also many who have lost.

It is early days for financial advisers to recommend, even indirectly, crypto investments. If asked, they could explain to clients what cryptos are, and the criteria that must be met before investing in them, and then let clients judge for themselves.

This doesn’t mean cryptos should be banned from the world of finance. As a speculative tool, like betting at a casino, they are a highly risky way to try to make money, and until the above three criteria are met they will remain unsuitable for recommendation by financial advisers, both in their advisory capacities or even during a casual drink in the pub. As things stand, cryptos have one formula: believe, invest and hope.   

• Prior, a former University of Cape Town academic, now heads a financial advisory practice in Cape Town.


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