Picture: 123RF/: RUNGWIT
Picture: 123RF/: RUNGWIT

Investors could be forgiven for suffering from FOMO when it comes to cryptocurrencies. However, before you rush in blindly, take heed of some wise words from asset managers and investment advisers who suggest a cautious approach - if you invest in them, only do so with money you can afford to lose.

Brandon Zietsman, CEO and head of investments of Portfoliometrix, which advises financial advisers on how to construct investment portfolios, says in a recent report that if you invest in cryptocurrencies "you can (as many have done) make a spectacular profit", but you can also do that at a casino. "It is called speculating, plain and simple."

Not like equities

Zietsman says when valuing cryptocurrencies, you need to know the economic return, the scarcity and the utility of the currency.

He says that unlike other asset classes like equities, real estate or bonds, cryptocurrencies have no economic return.

In the case of gold, an asset that does not have a yield, the metal is scarce and in demand by investors. This gives it its value, Zietsman says.

While a cryptocurrency, like gold, may have an artificial scarcity based on a finite number of "coins" that are increasingly difficult to mine, there is no impediment to new currencies coming to market, making the supply of cryptocurrencies practically unlimited, Zietsman says.

Even the artificial scarcity of bitcoin itself is not exactly absolute as bitcoin has split or "forked" into bitcoin subsets three times.

Always a gamble

He says trying to predict that any one cryptocurrency will become ubiquitous and displace all others, thereby gaining scarcity value, will always be a gamble.

In addition, there is regulatory uncertainty over cryptocurrencies and their volatility means they have limited value for conducting normal commercial transactions, he says.

Zietsman says if you want to invest, use the portion of your wealth you would normally allocate to your gambling habit.

"You may get it spectacularly right and retire a decade or two early, but you will, at some point, get it very, very, very spectacularly wrong."

Zain Wilson, an investment analyst at Old Mutual's MacroSolutions "boutique", says the entity regards cryptocurrencies as "un-investible" for its local funds because it is not clear whether they are considered currencies or commodities, and what the tax implications would be on any profits.

He says there are a few cryptocurrency exchange traded funds, futures and even dedicated mutual funds (investing only in cryptocurrencies) in the US.

You will, at some point, get it wrong
Brandon Zietsman, CEO and head of investments of Portfoliometrix

According to a Bloomberg report, Old Mutual Global Investors, based in the UK, has taken positions in cryptocurrencies, such as bitcoin, through its Gold and Silver Fund.

Wilson says the value of bitcoin, the most widely used cryptocurrency, depends on trust and whether there is a large enough network of users to give it legitimacy.

The two greatest obstacles to expanding this network are the uncertainty around government regulation and the high volatility in the price of bitcoin, which can dissuade an everyday mom-and-pop user, he says.

Expect volatility

As long as bitcoin's use as a currency remains unclear, the price is likely to be volatile and the risk of a bubble is relatively high, he says.

Despite this, he says the digital payment method that cryptocurrency represents has a viable value proposition and there will be big opportunities for it.

Launched in 2009, bitcoin was worth about $1,200 two years ago.

Since then it has soared to more than $19,000, dropped to $7,000 and recovered to around $9,000.

Investec Asset Management is also not putting investors' money in cryptocurrencies.

Last year Neville Chester, fund manager at Coronation Fund Managers, said Coronation saw opportunities in the underlying blockchain technology.

In all likelihood central banks would adopt a version of digital currency, but it would not be bitcoin, Chester said.

Last year's winner of the Financial Planning Institute's financial planner of the year award, Mark MacSymon of Private Client Holdings, says few of his clients ask about cryptocurrencies.

in numbers

$19,200: Bitcoin's high in December last year, up from $0.06 in 2010. It is currently trading at about $9,000

Those who have asked he steered away from the idea by asking them in turn how they would determine a reasonable valuation for the currency, and at what level they would sell it.

Even among the experts in blockchain and cryptocurrencies, caution is the watchword.

Valuable technology

Farzam Ehsani, the blockchain lead at RMB, says there is a lot of interest in cryptocurrencies because people realise the value of blockchain technology.

He expects cryptocurrency prices to appreciate over the longer term, but not before there has been a lot of volatility.

If you plan to climb in, "be very, very careful - don't go in just because prices are rising", he says.

Ehsani says when you invest in a new cryptocurrency you need to ask where the coin is coming from, what it is being used for, the ease of use, the scarcity, how portable it is, how big the network is, and so on.

Many people are trying to raise money with initial coin offerings and many of these launches "will end in tears", Ehsani says.

What others have to say

Jeremy Gardiner, a director at Investec Asset Management, told clients: "A lot of people are dabbling in cryptocurrencies who shouldn't be. Remember, no climb is too high until there are no more buyers. By all means buy if you think you understand it and think it will go up, but don't mortgage your house."

Kobus Kleyn, a Liblink adviser, said in a recent blog: "If you have no idea where the value and valuations come from and it cannot be explained to you, think three times before letting go of your hard-earned capital. If you do decide to invest, ask yourself if you are willing to lose 100% of the capital you let go."

Vinny Lingham, an internet entrepreneur and investor in Shark Tank South Africa, said in a recent blog: "I have a diverse range of investments, stemming from ... an investment fund in South Africa ... which invests in local companies ... as well as a number of investments in bitcoin/blockchain companies ... I also decided to put a small investment directly into bitcoin - representing a single-digit percentage of my net worth, as I have advised others to do in the past. If I lose it, it won't hurt, and if it outperforms the rest of my portfolio, then great, but it's not enough for me to worry about."

dupreezl@tisoblackstar.co.za

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