A while ago I had a conversation with a friend about so called crypto currencies, Bitcoin, Ethereum and the ilk.
We couldn’t agree on whether they were worthwhile to hold in a portfolio or not, let alone on what they should be called.
To me, they should be classed as an asset similar to gold or precious metals and not a currency. Even to call them a currency is a misnomer.
They are an asset that has its own risk mechanisms and measurements but they aren’t yet a currency with the common intrinsic values, ratios, trading mechanisms, risk profiles and matrixes that true currencies have.
This can be broken down into three areas.
Are they a measure of exchange?
No they aren’t. Not enough places accept them as a currency and the costs of doing so for smaller items is prohibitive. Imagine attempting to buy a Mars bar.
The merchant may accept the payment via crypto, but the trade would cost too much and the time scales would take too long.
Is it a store of value?
Yes they are, however the price fluctuates. Like any direct asset, once you buy it, it stores your wealth, just like holding gold does.
Are they a measure of value?
At present, this is a no. There are too few transactions carried out for goods or services in a market situation for them to maintain a measure of value. Heard about Bitcoin inflation? No, me neither.
The blockchain technology is a different matter though. This technology is here to stay and it will keep on growing so eventually, crypto currencies will only be a small part of it.
At the moment, the value of cryptos are purely based on what someone will pay for them.
That’s the reasons why you shouldn’t look at cryptos as a currency. They need to be treated differently. If you do want to invest in them, you need to look and treat them differently as an asset, not as you would another true currency.
By their very nature you cannot use the same exchange mechanisms as you would with US dollars or Yen. We are a long way off being able to take a forward option to buy or sell them in an open market. Once this happens yes, call them a currency.
Advice for investing in them.
Read, read and read some more and then treat them like walking into a bookmakers. Only gamble with the money you can afford to lose.
Paul McLardie is a partner at Total Wealth Management. Contact him at Paul.firstname.lastname@example.org