Should you invest in Crypto Currencies?
Should you invest in Crypto Currencies?
We recently have been approached by a Fund Manager that wants us to recommend their product. As we do with all approaches, we spend a lot of time completing due diligence. This particular Fund Manager has delivered over a 100% return in the last 12 months in high growth products and is also marketing an income product that will deliver between 4-7% returns. The income product is targeted at term investment holders. Fund Managers tend to focus on performance or fees when they spend loads of cash on advertising. Thankfully, the Financial Markets Authority has just issued a gag order to prevent this from happening. As a result, a Fund Manager switched their advertised returns from 12 months to 3 years at a return of over 25% per annum. Prior to the last 12 months the returns had been ok but not better than a lot of fund managers. There is plenty wrong with this marketing, targeting investors using performance, particularly targeting term investment investors with performance. As we worked through the underlying investments, we made the decision to decline to offer their products. Why? Their underlying investment strategy. Their high growth fund invests in Crypto currency and their income fund invests in a concentrated selection of high yielding stocks.
What’s wrong with that? Let’s start on the Income fund targeted at term deposit holders. The fund is highly concentrated to about 20 NZ and Australian shares. What happens when NZ and Australia aren’t performing particularly well? Also, yield is measured at the time you purchase, and it changes all the time. If a share price increases, usually that means the yield drops. How do you know you are getting good yield when you buy in?
Moving onto investing in Crypto currencies. Celebrities, with huge social media followings, have been promoting Crytpto currencies. Elon Musk is one of them, and has been charged by the American securities for fraud. You can read more about that here https://www.sec.gov/news/press-release/2018-226 If he owns Bitcoin what does he stand to gain from promoting it using his huge following?
Conspiracy theorists will tell you that with the amount of world debt we have, currency as we know it is going to fail. Crypto currencies are the way forward. While the currency failure is possible let’s look at what a Crypto currency is and is not.
What are the facts about Crypto currencies and in particular Bitcoin?
- Bitcoin is not a fiat currency. What is a fiat currency? A government issued currency that is not backed by a commodity such as gold. Fiat currency only has value as the government maintains it value. Would governments allow currency to fail?
- Bitcoin deliver no expected returns. Value is often derived from investments because it will deliver an expected return. From bonds this will be by way of coupon (think interest) payments on debt issues, (someone lends a company some money and expects set payments at a set rate of return, think of a bank lending you money for a mortgage). Bonds provide more certainty as the coupon payments are promised and in the event of company failure bond holders are paid before shareholders. From shares, this will be by way of dividend payments based on profitability or expected profitability. This can deviate from expectations.
- Holding cash does not provide an expected stream of future cash flow. Holding one dollar now does not entitle you to more dollars in the future. This is the same for Bitcoin.
If Bitcoin has no expected return, and it is not a fiat currency, then how is its value derived. Well, gold is similar in that regard. However, gold is regarded as a precious metal and a store of value. What is similar is the supply and demand of bitcoin and gold and the store of value utility. Bitcoin has a limited supply, although it is rising slowly. However, this may be eroded as more crypto currencies join the market.
Therefore, the future of Crypto currencies is uncertain. Regulators around the world have issued warnings to investors that guarantees of high investment returns that are misleading. There is no reliable way to predict what the value of Crypto currencies will do. So while the returns may look enticing, we believe in sticking to goals based investing using reliable data.
Anything else is effectively gambling. Which means you should only invest as much as you are prepared to lose into crypto currencies.
Which brings us back to the Fund Manager that we have just completed due diligence on. Depending on your risk profile, there may be room for highly volatile asset holdings in your portfolio. However, traditional assets, in a diversified portfolio, backed up by historical data, continue to achieve investors goals without taking on unnecessary risk. They do it without the hype, promotion and excitement of Crypto currencies. Which is exactly what investing should be. Boring. I’d like to think that this article is an example of how well we do boring!!
Notes:
Sources:
https://www.dimensional.com/au-en/insights/to-bit-or-not-to-bit?utm_source=linkedin&utm_medium=organic
Disclaimer: This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia. Please don’t take this as personalised financial advice. Discuss your situation with an Advisor. This is where I need to say past returns are no guarantee of future returns.
- Posted by Isbister
- On April 27, 2021