The Financial Wellness Coach: Fight FOMO when thinking…

Question: Some of my friends made a lot of money investing in Bitcoin. Should i invest in it?

First published in the Daily Maverick 168 weekly newspaper.

Reply: If you had invested R100,000 in Bitcoin a year ago, it would be worth more than R500,000. If you go to a social event, you will hear people talking behind their masks about someone who made a fortune with Bitcoin. This can create a fear of missing out (FOMO).

The question for me as a financial advisor is whether I should include Bitcoin in my financial recommendations.

I’ve attended countless webinars, listened to podcasts, and read many articles about Bitcoin, blockchain, and cryptocurrencies and still can’t speak to any real authority on the subject. However, with this health warning, I am going to share my thoughts on what to consider when making a decision.

Cryptocurrencies exist in the digital world and control is administered by a wide network of people using what is known as a blockchain. (I know I’m over-simplifying things here.)

Cryptocurrencies are attractive because:

  • You are independent of countries. Sending money from one country to another is very easy and cheap.
  • The currency supply is controlled. There will only ever be 21 million bitcoins. This means that a value is stored in the currency. Last year the US printed 20% of all dollars ever spent.

I believe there will be cryptocurrencies for the foreseeable future. However, there are more than 4,000 cryptocurrencies. While Bitcoin is the biggest, there are others like Ethereum and Tether that are growing in popularity. So which cryptocurrency are you going with? Choosing the wrong one can be costly.

There is a solution for this. There are companies that sell structures that track the performance of a range of cryptocurrencies. This will reduce the risk of choosing the wrong one.

Now we come to the question of whether it makes sense to invest in cryptocurrencies.

The big challenge for me as a financial advisor is that I have to understand before I can make a recommendation:

  • How an Investment Works;
  • How it is valued;
  • Which factors influence growth? and
  • What is its risk profile.

Is Bitcoin Cheap Or Expensive? Will it grow at the same rate as before, or will it slow down or even decrease? We have techniques to evaluate traditional investments. This gives us a common language to discuss them and to discuss the intrinsic value of certain investments. We can eventually make an informed call as to whether the investment is good or bad value.

At this point in time, I haven’t met an investment manager who can help me understand whether a particular cryptocurrency is over- or undervalued.

A year ago a Bitcoin was worth R140,000. It is now worth R740,000. Two weeks ago it was worth R 920,000. I have no framework to understand these prices and the reason for the move. I can’t understand if the R1 40,000 price tag was good or bad last year. I have no idea if the current R740,000 represents fair value. I cannot recommend a client to invest in an instrument whose value I cannot understand.

When you invest in cryptocurrencies, understand that it is a volatile and risky investment. Don’t use your pension or family’s grocery budget. Understand that this is a risky investment and that you could end up losing money.

Be careful about choosing a company to invest through. Currently, this market is not regulated by the Financial Sector Conduct Authority (FSCA) and there have been a number of scams that have used the massive returns of cryptocurrencies to attract investors. The FSCA recently issued a second warning that consumers should be very careful when investing in cryptocurrencies.

To answer your question, cryptocurrencies are likely here to stay, but there is currently no reliable way to value them. It’s hard to know if it’s overpriced or not. Investing in cryptocurrencies like Bitcoin is therefore associated with a massive health warning. You can make a lot of money – but you can lose it just as quickly. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available to Pick n Pay Smart Shoppers for free at these Pick n Pay Shops.

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Kenny Meiring

Kenny Meiring MBA CFP is an independent financial advisor. You can contact him at Financialwellnesscoach.co.za. Please send your questions to [email protected]

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