Bitcoin and other virtual currencies: Investment or gamble?

The purpose of this article is to highlight important aspects that investors must consider as virtual currencies have clearly become the new “flavour of the decade”.

One of the first questions a potential “investor” should answer is, “Why do I want to invest in Bitcoin?” If the real answer is, “I want in on the action and to make a lot of money like everybody else!”, be very careful.

This may be the greedy part, that lies hidden in all of us, driving you towards putting some of your hard-earned money into virtual currency, which may very well have shown spectacular returns up to now. However, before you part with your money, based on past “performance”, consider this statement by Benjamin Graham, author of The Intelligent Investor:

“While a trend shown in the past is a fact, a “future trend’ is only an assumption.”

How many investment schemes, which have all promised extraordinary high returns in the past, have eventually exploded in the faces of people who could least afford it – even recently? How many times do we say after losing our money, “I should have known! When something looks too good to be true, it probably is”? Will history repeat itself as thousands of people, some of them even registered financial advisors, buy into, and express “expert opinions” about investing in virtual currencies such as Bitcoin, Darkcoin, Peercoin and Feathercoin? Again, Benjamin Graham warned:

“Those who do not remember the past are condemned to repeat it.”

World famous investor and investment manager, Warren Buffett, thinks coin offerings will end badly. “People get excited from big price movements…,” he said. Buffett remains sceptical, saying: “You can’t value bitcoin because it’s not a value-producing asset.” He added that there’s no telling how far bitcoin’s price will go and described it as a “real bubble in that sort of thing.” [See  this link]

Jacques Plaut, Portfolio Manager, Allan Gray Equity Fund wrote: “We are always looking for good ways to preserve capital and earn returns for clients. We do not think bitcoin is an instrument which will enable us to do this… “I see some similarities with previous bubbles, but all the signs are not yet there.” Neville Chester, manager of Coronation’s Aggressive Equity strategy explained: “Bitcoin generates nothing. It is a speculative investment in that the value of a Bitcoin is determined only by the price someone else will want to pay for it.”

According to National Treasury, the Financial Services Board and the Reserve Bank, while virtual currencies can be bought and sold on various platforms, they are not defined as securities in terms of the Financial Markets Act. Bitcoin and other virtual currencies are not regulated, and Treasury has clearly stated that there are no specific laws or regulations that address the use of virtual currencies and consequently, no legal protection or recourse is afforded to users of virtual currencies.

According to Anton Swanepoel (financial services industry thought leader, speaker and author), “I have seen more than my fair share of hype in the financial services industry over the last 28 years to get very nervous when I hear how many people are buying into these currencies. It is during times like these that Warren Buffett’s advice comes to mind:

‘Be fearful when others are greedy…'”

So – are cryptocurrencies an investment or a gamble? At this point, they are a gamble.