Crypto’s still cryptic

Bruce Brammall, The West Australian, 15 February, 2021

Elon Musk doesn’t care much for rules or boundaries. Certainly not the rules of science, gravity, defamation or securities exchange bosses.

He revels in having an extreme view on pretty much everything, from populating Mars to Covid-19, from public transport to artificial intelligence.

And the world needs people like that – people who push envelopes – to progress.

So his latest bold call probably shouldn’t come as a surprise. He’s become the highest profile supporter of Bitcoin, tipping in $US1.5 billion ($A1.9 billion) to invest in the cryptocurrency and declaring Tesla will accept Bitcoin to buy their electric cars.

Crazy? Genius? Or just reading the tealeaves?

Probably parts of all three.

Cryptocurrencies continue to confound financial professionals. To many, cryptos seem to be a flash in the pan, our century’s tulip-mania. When the price of Bitcoin crashed by 80 per cent in 2018, it seemed the pros were right.

But rumours about Bitcoin’s death were, as they say, greatly exaggerated.

From being worth less than $US3200 in December 2018, the value of a Bitcoin is now nearly $US45,000.

How does something that doesn’t physically exist gain such value?

Demand and belief. And the Tesla chief’s move could be a signal to other major world companies that crypto is legitimate currency and they need/should get on board.

Imagine if Apple started allowing iPhone users to make purchases with crypto using their Wallet app? That could completely change the game.

Already believing in this are punters. A recent survey by financial comparison website Finder found a quarter of Australians either already own cryptocurrencies, or intend to by the time the year is out.

The biggest believers are amongst the young. Around 44 per cent of millennials have, or intend to, become investors by the end of 2021, while the figure is only 4 per cent for Baby Boomers.

But are cryptos a payment method of the future? Or a speculative investment?

Probably “both” at the moment. There are predictions a Bitcoin could be worth $US300,000 or $US400,000 within a decade.

Given the massive volatility in the value of cryptos, why would a business accept payment via cryptos? They could accept payment one day, only to have the value of that payment fall by 10-20 per cent within a few days or weeks.

Profit margin … gone.

Would you accept being paid your salary in cryptos? If another crash occurred like 2018, you could see your salary cut by 80 per cent over the course of a year.

Or potentially increase six-fold, as did Bitcoin’s price between its Covid-19 low in March 2020 and this month.

Would you take that risk? It’s an extreme example, sure. But if cryptos are to be taken as legitimate currency, then it’s not that far off the scale of possibilities.

Can’t see myself doing it. Too many financial commitments to risk it. If I were still in my 20s, single and financially unburdened, well … that might be a different story. But I’m not.

But where is crypto now?

I’m going to put it in the speculative investment basket for now (and maybe a legitimate payment method of the future). And speculative investments are, inherently, riddled with extreme risk. (Not far off gambling.)

And let’s not forget just plain losing your Bitcoin, like German born programmer Stefan Thomas, who has only two guesses remaining to get his Bitcoin password right, or he loses around $US315 million.

The experts are going to say “only bet what you can afford to lose”.

As with all investment strategies, diversification is still important. If you’re not wanting to “put the lot on black”, then cryptocurrencies should only make up a small portion of an investment portfolio.

How much would a diversified investor, therefore, punt on cryptos? Probably no more than 5 per cent of a portfolio. And if someone were to put in that in and the value of the crypto quickly doubled to become 10 per cent, then, technically, take some profit and reinvest, each time it does that.

But taking profits can be hard to do because of FOMO – the Fear Of Missing Out – on further gains.

And while his bold move has given oodles of legitimacy to Bitcoin in particular, it’s not like Elon Musk hasn’t made some spectacular mistakes in the past.

Just don’t punt your entire fortune on black.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au.