For any investment, there must be a logical method in the market to measure the value of an asset. However, these metrics are not applicable to cryptocurrencies, and their level of appeal remains elusive.
Would you be curious to learn more if you discovered an investment product shrouded in mystery?
There is one such product gaining increasing attention: cryptocurrency. The term "crypto" originates from the Greek word "Krytos," meaning "secret" or "hidden."
A recent survey by financial comparison platform Finder.com involving 985 Singaporean adults revealed that approximately 16% hold cryptocurrencies, a proportion similar to that in Hong Kong and Indonesia. Slightly higher rates were observed in Malaysia and Australia, at around 18%.
The fact that the percentage of cryptocurrency holders in Singapore decreased to 16% in the survey, down from 19% in early 2021, came as a slight surprise to me, as I’ve noticed growing interest among friends eager to trade cryptocurrencies.
The cryptocurrency ecosystem is vast and continually expanding. According to the same survey, popular cryptocurrencies include Bitcoin, Ethereum, Cardano, Binance Coin, and Dogecoin.
The total value of all cryptocurrencies exceeds $2.5 trillion. If traders maintain a bullish outlook, prices could continue to soar. But is this enthusiasm justified? What does the future hold for cryptocurrencies?
At an FSMOne event titled "Where to Find Investment Opportunities in 2022" held in January this year, we discussed cryptocurrencies and expressed a clear view: while many enduring investment strategies exist, cryptocurrency is not one of them.
Trading Cryptocurrency Is Speculation, Not Investment
From my perspective, trading cryptocurrency should not be considered investing—it is speculation, or even akin to gambling.
In traditional investing, logical methods exist to measure an asset’s value. For instance, with stocks and bonds, widely accepted metrics gauge their attractiveness, such as price-to-earnings ratio, price-to-book ratio, return on equity (ROE), profit margins, earnings yield, yield-to-maturity, and yield-to-worst.
Similarly, fiat currencies in circulation are backed by their respective governments.
However, none of these metrics apply to cryptocurrencies. Investors holding cryptocurrencies cannot measure their appeal through cash flow, earnings, or dividend yield. Cryptocurrency prices are not supported by economic fundamentals. Bitcoin, the largest by market cap, carries exceptionally high risk. While a global bank once predicted Bitcoin would reach $100,000 by the end of 2021, it ended the year just above $47,000.
Bitcoin’s price is highly volatile and often influenced by tweets from figures like Tesla CEO Elon Musk, former Twitter CEO Jack Dorsey, and other asset managers. Wild predictions abound that Bitcoin’s price will soar to astronomical levels due to demand outstripping supply, fostering a "fear of missing out" (FOMO) among believers.
But if cryptocurrencies are more widely covered in the news and global financial institutions rush to offer these products to clients, does that make them good investments?
The answer is no. Even if adoption increases, it doesn’t rectify Bitcoin’s flaws as an investment vehicle. This echoes the 2008 global financial crisis, when investors poured money into structured products, and the early 2000s dot-com bubble, where investors bought into loss-making tech stocks at their peak. During the financial crisis, collateralized debt obligations (CDOs) and credit default swaps (CDS) were sold by large, reputable financial institutions. Could they truly assess what constituted a good investment? In reality, what institutions deem good investments aren’t necessarily beneficial for individual investors.
Local financial regulators have recently issued warnings about cryptocurrencies. On January 17, the Monetary Authority of Singapore (MAS) released new guidelines restricting crypto service providers from promoting their services to the public. Loo Siew Yee, Assistant Managing Director (Policy, Payments & Financial Crime) at MAS, stated that while the authority strongly encourages innovation in blockchain technology and value-added applications of crypto tokens, cryptocurrency trading carries high risks and is not suitable for the general public.
The Evolving Investment Landscape
The investment world is changing rapidly, with new concepts and innovations emerging. For example, driven by sustainability and reducing environmental impact, companies now must consider economic, social, and governance (ESG) factors more thoroughly. I believe that when the next generation becomes investors, integrating ESG considerations will be the norm. Additionally, the metaverse is set to transform the world, as evidenced by Facebook’s rebranding to Meta. These are significant developments that will alter how we invest and live.
However, investors should not mistake buying cryptocurrencies for investing in blockchain technology or gaining entry to the metaverse. Nor should they confuse cryptocurrencies with stablecoins or central bank digital currencies (CBDCs), both of which are backed by fiat currency and blockchain technology. It’s worth noting that CBDCs, supported by central banks, will grow in importance—countries like China have already demonstrated how central they believe CBDCs will be in the future.
For products claimed to democratize investing, investors should ask themselves: Who are the "whales" holding large amounts of Bitcoin? Who is Satoshi Nakamoto, the mysterious creator of Bitcoin? The lack of transparency around even basic questions like ownership is concerning.
Instead of opting for opaque products, investors should choose investments where transparent information is accessible, such as through exchange rules or a company’s disclosed philosophy, to ensure they understand its vision, business model, and profit mechanisms.
In summary, investing should not be shrouded in mystery.
Frequently Asked Questions
What is the main difference between investing and speculating in cryptocurrencies?
Investing typically involves analyzing fundamentals and long-term value, while speculating in cryptocurrencies often relies on short-term price movements and market sentiment without underlying asset support.
Are there any safe ways to gain exposure to cryptocurrency trends?
Rather than direct cryptocurrency purchases, consider investing in blockchain technology ETFs or companies developing crypto-related infrastructure, which may offer more stability and regulatory compliance.
How do central bank digital currencies (CBDCs) differ from cryptocurrencies?
CBDCs are issued and regulated by central banks, making them legal tender with government backing, while cryptocurrencies are decentralized and not backed by any central authority.
Why is regulatory approval important for cryptocurrency adoption?
Regulatory frameworks help protect investors, prevent fraudulent activities, and integrate cryptocurrencies into the existing financial system, potentially reducing volatility and increasing mainstream acceptance.
Can cryptocurrencies be part of a diversified investment portfolio?
While some investors allocate a small portion to high-risk assets like cryptocurrencies, it’s crucial to understand the risks and ensure that such investments align with your overall financial goals and risk tolerance.
What should I research before considering a cryptocurrency investment?
Focus on understanding the technology, market trends, regulatory environment, and the specific token’s use case. Always prioritize transparency and be wary of promises that seem too good to be true. For those looking to explore more strategies in digital assets, thorough due diligence is essential.