A question every financial adviser will have at least one to two times per week is ‘should I be looking at cryptocurrency’?

Just about everyone knows of someone who has done well in ‘crypto’ and there are probably a lot more who have lost as much or more, that aren’t talking about it.

As an advice business we can’t recommend cryptocurrency for a very simple reason:

We don’t know how to value Cryptocurrency!

If we talk about conventional investments like property, shares and bonds, we know the drivers that impact on their performance.

  • Rental yield drives property growth and variables like interest rates, vacancy rates and cost of building can all impact positively and negatively.
  • Earnings growth is a primary consideration for shares/stocks as healthy companies can increase their earnings which could generally increase their profitability.  More profits can lead to increased earnings, dividends, innovation etc.
  • Bonds which include things like government issued bonds and corporate bonds as well as hybrids are driven by yield, foreign rates relative to our own, inflation and capital demands.

How do we value cryptocurrencies?

Crypto does sometimes move in the same directions as other asset classes but arguably, its primary driver of value, is scarcity.  

  • It can be attractive as a medium of exchange, as the buyers and sellers remain anonymous and it is portable across jurisdictions. 
  • If you can’t get money out of your country of residence, bitcoin purchases could be an option.
    • There is evidence that Chinese investors are using their $50,000 annual forex purchase quotas to move money into cryptocurrency accounts.
    • South Africans countries are also mentioned as possible users for this purpose. Paycorp, in South Africa, allows users to withdraw their cryptocurrencies as cash from over 3,000 ATMS in the country.
  • It is attractive to illegal activities such as payment in things like slavery, human trafficking, drug shipments, ransomware, and extortion.

These are functional attractions- albeit some questionable uses – to crypto but that is not how Australians are making money from it.

For most Australians their exposure would be through trading the currencies themselves, rather than using it to buy and sell goods and services.

Two of the most common ways to trade are:

ETFs

You can now access crypto currencies through various platforms and even ‘Exchange Traded Funds’ ETFs, listed on the stock exchange. 

  • The access via ETFS usually provides access to a broad range of cryptocurrencies via one investment rather than having to pick a winner and diminishes the risk of scams and bankruptcies due to corporate failures like FTX and the now notorious Sam Bankman-Fried.

https://www.investopedia.com/investing/understanding-cryptocurrency-etfs

Crypto Trading platforms.

Many crypto traders will buy directly and there are legitimate platforms that can protect the buyers and sellers.

https://www.forbes.com/advisor/au/investing/cryptocurrency/how-to-buy-bitcoin-in-australia

https://www.forbes.com/advisor/au/investing/cryptocurrency/crypto-scams-to-watch

Traders buy and sell based on moves in the underlying price and demand and supply is driving the fluctuations in price.

How compelling are crypto returns?

The most well-known crypto currency is most likely ‘Bitcoin’.

Five years ago, 3rd May 2019, one bitcoin was $8,218 AUD.  On the 22nd of April 2024 that coin is valued at $102,215 AUD.

It has been an exciting ride and investors at various parts of the cycle would have been a little anxious when the value dropped from $87,845 AUD (12 Nov 2021) to $24,623 AUD (6 Jan 2023).

However, a five-year compound return of 66% is amazing.

So, why don’t most advisers, including us, recommend it?

The concern from an advice point of view is simply that we cannot point to what drove the correction in 2021 or the recovery in 2023.  We can’t then see what will drive value into the future. 

Increased regulation may occur and how will that impact?  What is a bitcoin worth if various jurisdictions prevent its use or crack down on the providers?

Bitcoin, similar to gold, does not have any income characteristics, so in negative periods, will not provide income while waiting for the price to recover.

The value could well soar, but I can also double my money by popping into the casino and betting it all on black?   Proponents will argue the risk of 100% loss are very low and that is valid, but still more possible than a zero result for physical assets like shares and properties.

Achieving significant wealth can be a huge windfall gain, like the lotto, or the steady accumulation of assets over time.  Disciplined investing, calculated business risk, tax minimisation and using cashflow to build assets in the right structures, may sound dull, but it has a far higher success rate than many a get rich quick scheme.

Playing with technologies like cryptocurrencies can be rewarding but we would always be arguing for a diverse range of assets with differing risk characteristics to grow and retain your wealth and quality of life.