What You Need to Know About Crypto
It’s still early days in Crypto Land and I’m not here to tell you whether or not to invest in it, but I would like you to know the facts around crypto currencies. This is a hot topic and I want you to be able to make educated financial decisions about whether it’s right for you.
Many everyday people are ‘for’ crypto, but the majority of financial professionals are ‘against’ it simply because it can’t be explained or valued. The truth is no one knows whether crypto is society’s answer to decentralised free banking or just a fad that will soon be regulated out of existence. The future is uncertain, here’s why…
1. Crypto is not an asset - there, I've said it
Crypto turns traditional investment theory on its head. For starters, it doesn’t meet the definition of an asset.
Asset - A value-adding resource that can be owned.
Unlike shares, crypto doesn't produce income (e.g. dividends) and it doesn't have a measurable underlying value (e.g. a Balance Sheet). It’s not convertible at a fixed rate, and it’s only ever worth one of two options:
Nothing; or
Whatever people will pay for it.
2. Crypto is unregulated
The point of crypto is that no-one is in charge. It’s success therefore relies on trust. Trust in the code that writes the transactions (blockchain), trust in the platforms that allow us to access it, and trust that there will always be someone ready to buy it from you for more than you paid for it.
Since the introduction of the original crypto (Bitcoin) in 2008, tens of thousands of new kinds of crypto currencies have been created - by anyone and everyone (including criminals). They each have their own blockchain tweaks.
FACT: China banned all mining, trading and holding of crypto currencies in 2021. Crypto is now illegal in China and 8 other countries. It’s also implicitly banned in 42 more countries by way of trading restrictions. ( Ref: https://fortune.com/2022/01/04/crypto-banned-china-other-countries/)
It’s just a matter of time before more regulation comes.
3. Crypto is highly speculative
Some of the big banks have started offering crypto on their trading apps but I assure you, this is not because they believe crypto is a value producing asset. They’re offering it to customers simply because it’s popular and they want to take a cut on the trades. The big banking execs are not about to sell their banking stock options in order to buy crypto. Crypto is a long game right now. No-one shorts it.
As Warren Buffet (the most successful fund manager of our time) explains…
“When you buy a farm, you know that farm has value because it is capable of earning income. The farm itself has a value and the future income it produces for you has a value.
When you buy a non-productive asset (like crypto), all you’re counting on is that the next person you sell it to will pay more for it. The crypto itself produces nothing. You’re simply relying on the fact that someone else is excited to buy it for more. The less people know about crypto, the more excited they become and the more they buy. The price therefore goes up.”
It's fickle and highly speculative. It’s basically gambling.
4. You can’t pay your taxes with it
Then there’s also the fact that crypto is not accepted as legal tender.
You can’t pay your taxes it with and “there’s no reason in the world why governments like USA (or other western countries) would let crypto replace their currencies” (Warren Buffet). In other words it’s never going to be allowed to replace federal banking systems. Remember, China and eight other countries have already banned it!
5. It’s bad for the environment
Crypto currency comes into existence through crypto mining. Crypto mining involves many power hungry computers coming together to solve complicated mathematical problems in order to create blockchain. These computers require massive amounts of electricity - more than many whole countries! It’s becoming a huge environmental problem especially when miners seek out cheap, dirty electricity like that available in third world countries.
To sum up…
“Bit coin is a thing people buy because they think they are going to be able to sell it for more in the future - though they recognise they may have to sell it for less. This is not in generally a useful quality in money.” Jacob Golstein, Money, 2020
Money was created as a store of value. No-one knows what one crypto unit bought today will buy in 10 years time.
I wish everyone well in their crypto trading should they wish to do so. The decision is yours. I may even dabble in it myself, but I’ll never make it a substantial portion of my portfolio because of its speculative nature. I hope you now have a deeper understanding of it.
🧡 Julia
Legal Note: Information provided by Love Luck Wealth is factual in nature and does not take into consideration your personal financial situation. It is for educational purposes only and does not constitute financial advice nor financial product advice in any way. Remember, the value of any investment can go down as well as up. Before acting, you should consider seeking independent personal financial advice that is tailored to your needs from an appropriately licensed or authorised financial adviser.