We need to start with a philosophical point. Behind any query about investing in a particular asset class, or a specific asset within that class, is an implicit concern about risk. ‘What risk am I running by investing in this or that asset?’ is the more useful question.
PwC crypto expert Lawrence Wiseman, a director in the firm’s deals practice, points out that there is no such thing as a ‘safe’ asset class.
‘Class’ refers to a whole category of assets. Shares are an instance of an asset class. Bonds are another, as is real estate, or cryptos, for that matter. Within each class will be a range of different assets.
Wiseman makes the point that, just as there is no perfectly safe asset class, not all the assets in a particular class will be as dangerous or have the same level of risk.
If that sounds like picking a particular asset is the equivalent of picking a name with a pin while blindfolded, he argues that over time we have come to understand quite a bit about the risks associated with traditional asset classes, such as stocks and bonds.
“The problem with cryptocurrencies is that we are still coming to grips with the investment risk that they represent,” he comments.
This uncertainty is reflected in the price volatility associated with the better-known cryptos. Their value, like the value of a house that goes up for sale, is exactly what people are prepared to pay for it at any time. No more … and no less.
Faith and trust come into play. When the price of Bitcoin is surging, people tend to pile in, convinced that they are on to a winner. Greed rules. Then, when a scandal rocks the crypto world, fear rules and the price tumbles. That’s tough for those who bought at or close to the price peak but great for those folks who held off, waiting for a softer entry price.
Of course, if they get in while everyone else is still selling, their entry point will be under water fairly rapidly, which is what you get with a volatile asset. As any investment manager will tell you, timing any market is tough. Which with the crypto markets is even tougher because the uncertainty is so much deeper.
Does it mean that you can’t make money investing in cryptos? No – but it does mean that the risk is such that you probably shouldn’t invest money you are not prepared to lose. It certainly shouldn’t be high up the list on any ‘widows and orphans’ fund.
It’s interesting to reflect on just how negative the comments were regarding cryptos and Bitcoin from some of the investment world’s sharpest experts back in the recent past, but many of those have moderated their opinions quite drastically.
The website Crypto News has dug up a few of these quotes. JP Morgan Chase CEO Jamie Dimon called Bitcoin “a fraud” and “worse than tulip bulbs” in the early days. This year JP Morgan is much more interested in the whole blockchain, cryptocurrency phenomenon.
Similarly, about the same time that Dimon was bashing cryptos, Warren Buffet called cryptocurrencies “a mirage” and warned people to stay away from them. His opinion, apparently, hasn’t softened.
In May 2022 Buffett told delegates at Berkshire Hathaway: “If you owned all the Bitcoin in the world and you offered it to me for $25, I wouldn’t take it.
I’d have to sell it back to you, one way or another. It isn’t going to do anything.”
Bitcoin, and other cryptos don’t make or produce anything, he pointed out. They are not productive assets.
That is undoubtedly true; nevertheless, the plain fact is that they do tend to surge in value. Getting on the right side of that surge can be extremely profitable, just as getting on the wrong side can be seriously painful.
Then too, as we began by saying, not all cryptos are the same crypto. They can have many different use cases associated with them. PwC’s Wiseman points out that it is probably misleading to lump all 22,000 cryptos into something called a cryptocurrency asset class.
“They really can be enormously different, one from another. There are cryptos that behave like bonds, others that behave like stocks, and still others which have a variety of different use cases. Many of the newer ones are associated with their own eco-system, such as computer games, or even aircraft chartering. This is a highly nuanced market and blanket descriptions about it have very little meaning,” he cautions.
Cryptology defined
The great early appeal of cryptocurrencies was that, unlike ‘fiat’ currencies such as sterling, the euro and the dollar, they were and still are (so far at least) independent of any government.
The cryptocurrency phenomenon famously owes its launch to an October 2008 paper by an anonymous character who called himself Satoshi Nakamoto. This paper gave birth to Bitcoin, the best-known of the current stock of more than 22,000 digital currencies (a synonym for cryptos).
Bitcoin is not just the best known of all the cryptos, it is also the most highly-priced and, possibly, the most volatile. In 2021 Bitcoin hit its highest value ever, with each coin priced at some $69,000. Over the past year, its lowest price was $15,516.53, while the high was $48,187.22. Recently the price was around $23,000. Not great if you bought at the top, but quite nice if you bought at $16,000. Go figure.
The big takeaway to remember is that the term ‘cryptocurrency’ covers many use cases. Not all cryptos are the same, not by a long shot!