ANDREW PRIOR: Should I join the faithful and bend the knee at the enticing crypto altar?

Many people are asking whether they should be investing in cryptocurrencies. They want to get rich, and salesmen from crypto exchanges invite us to get rich with them. Many accept the invitation.

Marketers love cryptos, and why shouldn’t they? It is their ideal product; it can be sold to those wanting extra cash, to those wanting to earn without working, and to the greedy who want to get rich quickly without having to work.

The result has been huge growth in crypto markets, from $200bn in 2020 to more than $2.3-trillion in mid-December. But the market is worth only $1.96-trillion now (a buying opportunity?).

The Economist magazine reports that 31% of Americans aged 18 to 30 say that they have bought and or traded a cryptocurrency, pointing to a growing number of young people worldwide who want to try the new thing and become involved with cryptos.

More people are saying they want to try out cryptos even if they don’t fully understand how they work (does anyone?) because they don’t want to miss the boat. “You’ve got to be in it to win it,” they say. Crypto believers also preach a gospel to those who value “financial freedom”. Why commit your assets to the antics of corrupt governments when cryptos offer you a future above and removed from manipulated currencies, they ask? “Assure your future, stay away from politicians, invest in cryptos” is the believer’s dogma.

Who has benefited? Certainly the founders of the four major crypto exchanges, who have all become dollar billionaires. Why wait for the benefits of the afterlife when you can get them in this one, they preach to their followers.

Should you join them and bend the knee at the crypto altar? Registered financial advisers can’t help you answer this because cryptocurrencies are a nonregistered investment product. So, you’ll have to decide for yourself whether you become a crypto believer or a crypto denier.

To answer this take the following steps:

• Understand what you are investing in. If you want to invest in Coca-Cola, for example, first look at the bottle, taste it, understand where it is made, to whom it is exported, who buys and drinks it, and its long-term growth outlook.
• Look at the share price, the dividend it pays and its future earning potential. Only then will you be in a position to decide if it’s a good investment. You may also find that Pepsi is an  equally good investment and then decide that putting all your eggs in one basket is not a good idea, so split the investment money between the companies. You will sleep better at night. 

Cryptos have no inherent value. The value of major conventional currencies is backed by the governments where the currencies are used. Gold has value because of its scarcity, its long tradition of being mined, and the fact that it is held by governments and people around the world as a source of value. It can be held in coins or bars.

Cryptos exist in the computer code of their miners, which are inaccessible to the people who buy them. Should these computers be simultaneously destroyed or cease to function, cryptos would meet a similar fate and become worthless. That is highly unlikely, say their miners, who also argue that cryptos have scarcity that contributes to their value. For example, bitcoin’s blockchain is designed so that only 21-million coins can be mined, ensuring they remain scarce and maintain their value.

Zero-sum game

But what prevents crypto miners from rewriting their codes and manufacturing more cryptos? Already there are numerous different crypto currencies that are separately marketed and more are likely to be produced. “Built-in scarcity” is a myth propagated by the crypto faithful.

The sharply increased price of bitcoin, from $700 in 2016 to $50,000 midway through December 2021, is claimed by crypto believers as proof that it is a way to become wealthy. Many attest to this. However there are those who bought bitcoins at $50,000 that are now valued at $43,000, and if they were to sell it would be at a loss. Like the casinos that play a zero-sum game, there are as many winners as losers in the crypto markets.

Crypto believers also claim a growing number of companies are now using cryptos. A few companies are inviting people to buy their products in bitcoin, and for a while Tesla was taking bitcoin as payment for its vehicles. But it stopped when founder Elon Musk said the mining of cryptos used up too much power, and therefore fossil fuels, and China prohibited the use of crypto currencies.

Musk subsequently changed his position, but the toing and froing damaged cryptos. And even the founders of the crypto exchanges need hard currency to pay their tax and electricity bills.  Dealers will remain sceptical of cryptos until their value is stable. If a car dealer sold a VW on January 1 for cryptos and now wanted to convert the cryptos to dollars he would get about 15% less. That doesn’t make cryptos an attractive trading currency.

Financial freedom

And there is no shortage of crypto scammers. South African Johann Steynberg, CEO and founder of collapsed bitcoin trading platform Mirror Trading International (MTI), was arrested in Brazil this week. Steynberg disappeared in late 2020 after MTI stopped payouts to thousands of members, most of them South Africans. And he used part of the proceeds of an estimated $1bn to buy a plantation in Panama. Some of us know victims who sent MTI their bitcoin because they believed the promises of huge returns, over and above the market value increase. Not much chance of them getting anything back.

It is impossible to predict what cryptocurrencies will be worth in five years. The answer is a shrug... “more or less than what it is now”. It could therefore be some time before cryptos offer financial freedom from “fiat” currencies to boost the dream of financial freedom and cheapen cross-border payments. Put this question to the believer and to the denier. The believer will say “Sooner than you think”, and the denier “If ever!”

So, the answer to the question “Should I invest in cryptocurrencies?” is “No”. Speculate if you like, as you might at a casino, and you could get lucky. But cryptos are not “investments”. Until the day countries with stable currencies such as the dollar, pound, yen and euro back up crypto currencies, they will remain suitable only for speculators. This answer won’t deter the believers. Like religious disciples crypto believers will remain steadfastly loyal to their dogmas.

It is worth remembering the old Wall Street saying: “Bulls make money, bears make money, pigs get slaughtered!” 

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