BACK in 2017, when I was asked about cryptocurrency, I gave my honest answers in this column. In short, buy and read the book ‘Extraordinary Popular Delusions and the Madness of Crowds’. There. I could stop now.
In this book there were numerous examples of crowds chasing solutions and ‘investing’ ‘full tilt’ only to find out that the tulip bulb they ‘invested’ in was a tulip bulb. Whether it was Tulipmania, the South Sea bubble, the Mississippi scheme, the magnetizers, witchmania or haunted houses, the behavior is the same, and today it is still the same.
For example, one tulip bulb was valued at nearly $600,000 (in today’s terms) in 1637. In 1639, Rembrandt bought an excellent house in Amsterdam for almost the price of one bulb.
A market was set up on the stock exchange and tulip jobbers (stock brokers) made money by buying low and selling high at the expense of the seller and buyer of course – today again it is still the same. The more volatile, the better. Houses were sold and the cash was invested in tulips. Houses were sold at ruinous, ruinous prices as the profit on the tulip (based on a ‘faith’) would make up for it. Until it didn’t.
Cryptocurrency, NFTs (Non-Fungible Tokens) and blockchain are all very different but are usually lumped together. They are not. Do not invest in them unless you fully understand them and are prepared for any loss.
Crypto has a use and a viable use in terms of a digital currency, but no real store of value. The fact that someone has to ‘mine’ to find an algorithm doesn’t refer to any future value, and just because something is trading at $10 or $50,000 doesn’t mean it’s worth it.
If crypto drops in ‘value’ from $50,000 to $10,000, it doesn’t mean it’s cheap, it means someone paid $50,000 for it before, and they were wrong. If I can teach you anything about value from 35 years of experience, it’s that if anything can get cheap, it can get cheaper – a lot cheaper.
Just because it’s cheaper doesn’t mean it’s useful – remember Del’s face in Only Fools and Horses where Rodney comes back with lots of useless objects he bought at auction just because they were heavily discounted. That education was there for all of us, but it’s only when the pupil is ready that the teacher arrives.
There is a part of your brain called the prefrontal cortex that modulates emotions. When we are highly excited (fear or greed both work), our logical brain goes into slow motion or stops. We become highly malleable, and our thinking is binary – fight or flight.
It is this emotional binary thought process that has many caught up when looking at crypto/tulips for that fear of losing (FOLO). I have dealt with many tax positions in the last five years and not one has had a profit from crypto there, so take the bar chat about how much is being made with a pinch of salt.
Remember, the real need at the start of crypto was the power to take the money away from central banks and use your own currency. It is good, a good thing, and a good use, but as for ‘value’. What value would it have if a central bank or government banned it for a ‘reason’? Its value would disappear overnight.
It is well known that many centralized governments want a digital currency. Britcoin was tabled for around 2025 by Rishi Sunak when he was chancellor. I am deeply uncomfortable with the power that a centralized digital cashless society could wield in the wrong hands, so will oppose it.
In a previous column, and to those who asked, I always said that a build-up of cash in the digital currency arena, followed by a crash or corruption, would then drive the need for the aforementioned ‘regulation’. It will always come, so… enter FTX’s crash and a story that will run.
Keep in mind that blockchain is the great story of crypto and all transactions are always visible and can never be changed, so it should be easy to find $1 billion of missing money, right?
No surprise then when googling ‘FTX cryptoregulation’ there are over 27 million results. We will soon have a call for regulated central cryptocurrencies, regulated by those who wanted to leave the crypto world behind. It was this point I made in 2017 and it remains true today.
Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorized and regulated by the Financial Conduct Authority. If you have a financial query, contact us via firstname.lastname@example.org or by calling our regional office on 028 6863 2692