The brutal truth about cryptocurrencies

Digital tokens, cryptocurrencies and blockchain-based business models are here to stay, but we have always urged caution about the volatile nature and unpredictability around this growing phenomenon.

In our latest blog, our managing director at Prime Wealth, Glen Callow provides a raw insight into the brutal truth about this industry.

Growth of crypto

Bitcoin, the original cryptocurrency, has seen both astronomical growth over the last decade and major selloffs at various points in between. The value of other cryptocurrencies such as Dogecoin have also risen and fallen even more sharply, often based just on Elon Musk’s tweets.

Similarly, NFTs are assets in the digital world that can be bought and sold, but which have no tangible form of their own.

These digital tokens, which emerged in 2014, can be thought of as certificates of ownership for virtual or physical assets. They have a unique digital signature which means they cannot be copied or replicated.

A viable investment?

Glen said the volatility of the industry, coupled with the lack of intervention of a trusted third party like a central bank or financial institution, means we could not presently recommend them as a viable investment in good conscience.

He said the unpredictability of these markets indicate why curious investors should pause before investment.

“Financial planners in the UK tend to avoid these assets due to the fact it is highly speculative in its nature with zero investor protections. The Financial Conduct Authority (FCA) itself has said those who invest in cryptocurrency should be prepared to lose all their money,” said Glen.

“In reality, the recent craze around NFTs have created potential asset bubbles which are yet to prove if they have any intrinsic worth. Indeed, a digital perfume in a digital bottle has been released recently which is possibly indicative of the market getting a little bit frothy!”

Invest money you can afford to lose

Glen said Prime Wealth has had some clients who have invested in cryptocurrencies, some of whom have been successful. However, he would still strongly advise that if people wish to participate in this market, they should do so only with money they can afford to lose.

“In the last few months, crypto assets have become highly correlated with the wider market sell-off and don't even offer diversification characteristics,” he added.

“The appeal to the younger generation of crypto investors is the ability to make money quickly and to see their investments increase quickly. However, they must understand that the opposite can also be true, and they may lose part or all their investment.

A wiser investment

“What may be a wiser investment is the more traditional approach, where you invest regularly and over the long-term either by choosing a diversified range of companies, sectors and geographies – or better still, working with a financial adviser who understands your needs and goals and can build a plan to help you reach them.

“At present, investing in digital assets is more akin to gambling or speculation than investing. Often the only thing investors really understand about their crypto-assets is that they have gone up or gone down in value.  This is simply a case of hoping there is someone who will ultimately buy the asset off you for more than you paid for it.

“Investing in a company is very different as often it will have its own product, brand, workforce, assets, turnover, profit and perhaps future prospect for growth.  All of which are tangible, making it a safer investment.”

Regulatory management of cryptocurrencies today

Regulators are racing to draw up rules to manage cryptocurrencies amid concern their growing popularity could threaten established financial systems.

Meanwhile, the US is moving to craft regulations amid rising concern that the cryptocurrency industry is a haven for criminals.

Environmental impact

Glen added: “In addition to the high risks of investment, the process of generating digital coins via banks of powerful computers, called mining, is also highly energy intensive. Recent research suggests that Bitcoin now generates carbon emissions comparable to the country of Greece!

“It is for these reasons that we would always recommend our clients invest using a regulated financial advisor who can help them navigate the precarious and often risky areas of investments.”