Why we don’t invest in cryptocurrency

Bitcoin, Ethereum, Tether, Dogecoin… it is an ever expanding field and there are thousands of different cryptocurrencies in existence.

With new digital tokens emerging constantly, it is easy to get swept up in the hype but here at First Financial we have made a conscious decision to steer clear of this type of investment.

Today, we take a look at the realm of virtual currencies and Graeme Quinlan, Principal and head of our Investment Committee, discusses why we don’t invest in crypto.

Cryptocurrency is decentralised digital money – there are no notes and coins, just digital tokens. These tokens are built on blockchain technology. Blockchain is a type of system that records information.

Essentially it is a database, but it differs from traditional data storing methods as every new piece of data stores in chronological order and is irreversible.

It is utilised to create a digital ledger that is secure and trustworthy, as the blocks are not stored in one single database location. Instead, the information is shared across countless computers around the world.

The first cryptocurrency was Bitcoin, and it was created after the 2008 global financial crisis. Intended to remove the authority of central banks and other governing bodies, crypto was designed as a way for people to control their money and hopefully avoid another financial disaster.

The Reserve Bank of Australia explains cryptocurrency in more detail on their website.

There is no doubt that cryptocurrencies have seen incredible growth, but it all comes with incredible risk.

The growth links directly to the demand for the specific digital token, as many cryptocurrencies have a fixed supply. There is a finite amount of the currency available.

For example, Bitcoin is capped at 21 million. Many investors believe that crypto will continue to increase in value, but this is purely speculative.

We understand that there is an attraction to cryptocurrency, but from our perspective we believe that it is based on hype. We thoroughly reviewed crypto as an investment option but choose not to include it within our portfolios. Graeme explains:

“We suspected from the outset that it was unlikely to fit with our investment philosophy but we still had a good look into crypto. At its heart it is a currency… but it doesn’t do its job as a currency very well.

When you think about what a currency needs to do… it needs to be able to be exchanged for goods and services.

You can’t really use it in regular transactions… it takes a considerable amount as a transaction fee, so it’s expensive compared to traditional currency and it can also take around 10 minutes to validate a transaction, so it’s not as though you can use it like everyday money.

A currency needs to be able to store value and crypto doesn’t do that very well either. You’d be mortified if you bought a Tesla in Bitcoin, and you were about to make your last payment and it’s dropped 80% in value like it has done in the past – all of a sudden you have to pay 80% more than what you thought you had to pay. Or if you had your mortgage in Bitcoin… imagine that!

If it isn’t a very good currency… what else could it be? We can see the graph where its price has gone through the roof, but if it’s a capital asset – how do you value it? It doesn’t pay any income – so the traditional methods to try and figure out what it’s worth don’t apply.

It has all the hallmarks of a speculative capital asset which are incredibly hard to value. In our view, we think, ‘how could we defend the decision to go down that path?’ In 2011 and again in 2013 it dropped up to 80% in value and there’s every chance that will happen again.

So, it would be very hard for us to justify the basis of a recommendation to invest in crypto. We see the hype and euphoria… but we are happy for it to be someone else’s hype and euphoria. We’ll stick to traditional methods of fundamental analysis where you understand what you are investing in.”

“It is hard to see the long-term investment theory behind cryptocurrency. Currently when we look at it, we see red flags and it goes against a lot of our principles. Being able to see the fair value of what you can invest in and know what a fair price should be… we’d have to really push our principles aside to entertain crypto in our investments.”

At First Financial, we see our role as one of collaboration. We provide market intelligence and prudent financial advice so you can make decisions that suit your investment profile.

If you want to find out more about our investment philosophy, please contact us today.