ARE CRYPTOCURRENCIES A SOLID BET? FINANCE EXPERTS DON’T THINK SO
Bitcoin has been all over the news recently, in part due to Elon Musk and the announcement that Tesla would be investing in the digital currency, as well as accepting it as payment in the future, and Musk lost $15-billion when Tesla’s value skidded at the stock market, Falk Zielke reported for Deutsche Presse-Agentur (dpa).
The moves have traditional markets paying more attention to Bitcoin, and investors who took a risk on the digital currency at the start of 2021 can look forward to some hefty rewards. But is Bitcoin really a good investment? Is it possible to get rich overnight by buying some?
Bitcoin can't compare to gold, which has existed as a form of payment for thousands of years. A better way to look at the cryptocurrency situation is to compare it to the gold rush of the 19th century: "Back then, it was mostly those who sold the gold diggers their boots and shovels who got rich."
Experts are far from unanimous when it comes to such questions. Even on the question of whether Bitcoin and other digital currencies are an asset class in their own right, like shares, the jury is out.
"We wouldn't call cryptocurrencies their own, established asset class just yet," says Nicolas Pilz, who works for Societas, a wealth management company in Germany.
"For that they still need government acceptance and a certain amount of regulation."
On the other hand, Markus Richert, who also works for an asset management company in Germany, called Portfolio Concept, finds that they're "definitely a speculative asset class." Private investors, however, aren't completely sold. Just over 2 per cent of people over age 16 in the US own any amount in cryptocurrency.
Figures are similar in Europe, although around one in five (18 per cent) in Germany can picture themselves doing so in the future. And the rest? They plan to steer clear of Bitcoin and the like. "Cryptocurrencies are a subject of speculation," says Hartmut Walz, a behavioural economist who teaches at a university in Germany. He doesn't believe the term "currency" even applies here: "It's more of a way to store value."
Similar to gold, cryptocurrency supply is limited, and the high demand is therefore what determines the price. Meanwhile a large portion of Bitcoin's notoriously limited use as an actual currency comes from illegal online activities, be it drug deals on the dark web or as a means for hackers to anonymously collect payment from ransomware victims.
So should we be comparing Bitcoin to gold? No, says Richert, repeating as he said before: It has no intrinsic value. "Gold is at least used as a raw material to a certain extent," he explains. That means at least a base value can be determined. "Bitcoin is purely a combination of numbers without any real use that can be replaced by another cryptocurrency at any time," he points out.
Monika Gehde-Trapp, an expert on risk management at a German university, has tried to take a scientific approach to the question of whether Bitcoin is really a way to store value similar to gold. Her answer: No, not at all. On the contrary. Through calculation models, Gehde-Trapp and her team showed that investing in Bitcoin actually increases volatility in a diversified portfolio. A portfolio that's 10-per-cent Bitcoin and the rest purely stock-listed shares sees its loss amount increase by 5 percent.
"The recent rise in Bitcoin has not changed these results much," she adds. For the moment, Bitcoin is still too risky for long-term wealth creation, say many experts. "The fluctuations are simply too big," says Frank Wieser, from wealth management company PMP. "Digital currencies could become a (small) part of wealth creations in a few years, however. But now it's still too early," he says.
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