My first encounter with Bitcoin happened in 2017, with the news of extortionist hackers demanding 300 Bitcoin as ransom. Concerned ransom was to decrypt the files, which they encrypted with some ransomware.
Bitcoin and its siblings are subject to much debate and fascination. Bitcoin’s price change has been nothing else but a topsy turvy ride. While the view of most of the investment managers has recalibrated over theirs, most of them including me had been a little reluctant to advise cryptocurrencies to their clients. The last few yrs returns outweigh everything else and many have started speculating about its possible role in a portfolio.
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The swings have proved Bitcoins to be extraordinarily volatile, sometimes gaining or losing more than 30% in a month or two. Any asset subject to such sharp swings might get the fancy of traders whereas, for its place to be in anyone’s portfolio, I have my reservations.
Your portfolio generally consists of stocks, property, and bonds. Placing Cryptos in the same universe doesn’t make the case, at least not on merits. Although it can draw some of the parlances with gold.
Additionally, there are few other issues investors should consider:
- Bitcoin is not backed by issuing authority and exists only as computer code, generally kept in a so-called “digital wallet,” accessible through a password chosen by the user. Many of us have forgotten or misplaced computer passwords from time to time and have had to contact the sponsor to restore access. No such avenue is available to holders of bitcoin. After a limited number of password attempts, a user can permanently lose access. Since there is no central authority responsible for bitcoin, there is no recourse for the forgetful owner: a recent New York Times article profiled the holder of more than $200 million worth of bitcoin that he can’t retrieve. His anguish is apparently not unusual—a prominent cryptocurrency consulting firm estimates that 20% of all outstanding bitcoin represents stranded assets unavailable to their rightful owners.
- Gox, a Tokyo-based bitcoin exchange launched in 2010, was at one time the world’s largest bitcoin intermediary, handling over one million accounts in 239 countries and more than 90% of global bitcoin transactions in 2013. It suspended trading and filed for bankruptcy in February 2014, announcing that hundreds of thousands of bitcoins had been lost and likely stolen.
- The UK Financial Conduct Authority cited a number of concerns as it prohibited the sale of “crypto-asset” investment products to retail investors last year. Among them was the inherent nature of the underlying assets, which have no reliable basis for valuation; the presence of market abuse and financial crimes in crypto asset trading; extreme price volatility; an inadequate understanding by retail consumers of crypto assets; and the lack of a clear investment need for investment products referencing them.
The biggest question is: Where is the underlying asset?
For any asset, the price change is a factor of the underlying asset’s performance. Cryptos doesn’t have one, at least not to my mind.
It is like a manufacturing unit, whose stock price has seen huge swings, mostly upwards, and ironically they don’t have a manufacturing unit.
The financial services industry has a long tradition of innovation, and cryptocurrency and the technology surrounding it may someday prove to be a historic breakthrough. For those who enjoy the thrill of speculation, trading bitcoin may hold appeal. But for those in search of sound investment should consider the above-mentioned concerns, before joining the excitement.
And in the end “It’s not for faint-hearted “
- Nathaniel Popper, “Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes,” New York Times, January 12, 2021.
- Alexandra Harney and Steve Stecklow, “Twice Burned – How Mt. Gox Bitcoin Customers Could Lose Again,” Reuters, November 16, 2017.
- Prohibiting the sale to retail clients of investment products that reference crypto assets,” Financial Conduct Authority, June 10, 2020.
Risk is what u don’t see – Morgan housel
Disclaimer:- The opinions expressed are those of the author and are subject to change. The commentary above pertains to bitcoin cryptocurrency. Certain bitcoin offerings may be considered a security and may have different attributes than those described in this paper.
Ganesh Jha – is the CEO & Co-founder of Finofii Fintech Pvt Ltd (“AMFI-registered Mutual Fund Distributor”). He is an investment expert having more than 18 yrs of experience in Wealth Management Products &Investments. Finofii Fintech manages$100 Million of AAUMhaving offices at Delhi NCR and Chandigarh.