Jump on or get flattened by the Bitcoin bandwagon?
Jonathan Flint, Citigate Dewe Rogerson’s Chairman, discusses the challenge cryptocurrencies present to the financial planning industry
Some private savers and investors might be feeling a growing sense of Financial FOMO when the word ‘Bitcoin’ is mentioned.
The cryptocurrency poster child recently reached a market capitalisation of $1 trillion – equivalent to the combined value of the world’s three biggest banks. Bitcoin first started trading from around $0.0008 to $0.08 per coin in July 2010. Today the price is nearly $58,000.
Any private investor willing to speculate on Bitcoin’s value must be prepared to have the shirt ripped from their back. However, some investors have already cashed in gains of lottery winning proportions.
Supporters of Bitcoin often position it as a new asset which can take on the role of gold as a key part of a balanced portfolio. Gold is widely viewed as a likely protector of value and a strong performer in times of geo-political turbulence. But whereas gold has a solid track record and history of protecting value, Bitcoin’s antagonists point to its short history of volatility, a lack of transparency and the parlous lure of fast and high returns.
And whilst it’s usually wise to steer well clear of the hype, the continued growth of cryptocurrencies is a niggling stone in the shoe of the UK’s regulator and the financial advice industry alike.
The FCA’s cautionary note at the beginning of the year warned that products such as Bitcoin “generally involved taking very high risks with investors’ money” and counselled retail investors to ensure they understood all the associated risks.
There is scant regulatory cover for investors in cryptoassets who are unlikely to be able to benefit from the protection offered by the Financial Services Compensation Scheme or Financial Ombudsman Service irrespective of whether a firm has registration with the regulator.
And only last week an ad has been banned for “irresponsibly” promoting investments in Bitcoin. The Advertising Standards Authority said the campaign had targeted pensioners who were “unlikely to know” much about the topic with the watchdog drawing attention to use of the phrase “there is no point in keeping your money in the bank”.
Mike Morrow, Chief Commercial Officer at The Openwork Partnership, someone whose views I rate very highly believes, “Buying cryptocurrency still has to be considered alongside pure speculation and gambling due to the enormous levels of volatility and the lack of transparency and regulation in this space. It’s an interesting and fast developing area but it can’t be seriously considered as an asset class in its own right or as part of a balanced portfolio until it becomes more mainstream.”
Robert Jeffree, Chief Investment Officer of Omnis Investments, the asset management arm of Openwork, echoes these views, “Aside from risk – e.g. volatility – and liquidity concerns, we also see some ESG issues with cryptocurrencies in that they can be used for tax evasion and other illegal activities. There is also uncertainty around regulation and how governments and central banks will handle cryptocurrencies going forward.
“Lastly, it’s worth highlighting that cryptocurrencies are a proxy for a risk-on trade, contrary to the ‘store of value’ properties they are meant to have. In short, we don’t invest in cryptocurrencies. We do however see opportunities in Blockchain as a technology and how this might apply to other areas.”
The largest holders of Bitcoin are still those investment firms focused on cryptocurrency and digital asset strategies as opposed to household-name asset management firms. However, that investor profile is changing apace as more investors – institutional, corporate and retail – feel drawn to exposure to this new and emerging alternative opportunity for returns.
At some moment in the not-too-distant future cryptocurrency investment will simply become too big to ignore. This represents quite a communications challenge for the financial advice industry and the regulator whose overall responsibility is to educate, protect and guide investors on the risk, volatility and limitations of any investment option. But for now the industry’s emphasis is wisely focused more on the fear of investors messing up than the fear of them missing out.