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Cryptocurrency, or the art of buying what you don't understand: Editor's Views

Emma Rapaport  |  14 May 2021Text size  Decrease  Increase  |  
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I did it. I bought some crypto. Not because I understand it, because I don't, or believe in the investment thesis (see previous statement), but just to know how it felt. Don't knock it until you try it. I liken it to trying the latest Instagram trend. At least now I can say that I tried it, and my interest has well and truly piqued.

What did I buy you ask? Ethereum. My friend, who has admittedly made a truckload of money over the past year, recommended it. He uses it to trade non-fungible tokens (NFTs( so I trust he knows more about it than me. I also didn't want anything to do with Elon Musk so Bitcoin and Dogecoin were out. That man is a human starting gun. Before the tweet that sparked a selloff, I'd made a ~20 per cent return on my $100 investment. Today, I'm still up around 10 per cent. With my luck, I'll end next week in the red.

After copping the long waits and stringent verification process associated with setting up traditional share-broking accounts, on top of having to create another bank account, trading crypto was a breeze. I downloaded an app, transferred in some dollars, selected my crypto and hit “buy”. I've since "transferred" it to a wallet for safe keeping. It was pretty anticlimactic, almost eerily so. I'm not one for overcomplicated processes but maybe if you're trading large sums of money a bit of friction would be nice. I suppose that's what you get when middlemen aren't involved.

I learnt that there are thousands of cryptocurrencies in existence. The most popular among them – Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH) and Ripple (XRP). Then there are the so-called joke coins - dogecoin chief among them (for now) which was started to make fun of the wild speculation in cryptocurrencies. Somewhat ironic now considering its 26,000% increase this year. If you thought GameStop was insane, Dogecoin is next level:

Growth $100 GME v DOGE

Pricing data: Yahoo finance

Cryptocurrency is pure speculation. Prices are not determined by economic activity, reported cash flow, revenue, earnings, etc. My friend tells me his coins increase in value depending on how often they're spoken about, whether or not they appear in memes, and how integrated they are into digital marketplaces (like trading NFTs). But honestly, who knows. The basic idea is that units of cryptocurrency are created through mining in which computers solve complicated math problems to generate coins. The original motivation for this currency was that it's not regulated and under the radar. For my coin, Ethereum, I can trade it for another cryptocurrency, participate in an initial coin offering, trade it for goods and services (where available) or exchange it for "real" money. I haven't tested any of this, but I've been assured it's possible.

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Yes, I realise what I've done is as stupid as setting my $100 on fire. Whether or not it increases in value is not the point. I've bought something that I fundamentally don't understand – among the first lessons I learnt from Warren Buffett. Fear of missing out (FOMO) got the better of me and I wish it hadn't. When it goes up I celebrate, when it goes down I panic – it's a roller coaster of emotions, which isn't for the faint hearted. Its popularity with momentum investors and speculative buyers makes it prone to pricing bubbles that will eventually burst. And I still can't shake the feeling that I've bought something of no value. If this is how people get rich quick, I'd rather stay poor.

I'm also struck by the “bro-culture” wrapped up with crypto. When altcoins like Cumrocket start making headlines, and models on Instagram tell me to “buy the [bitcoin] dip”, no matter what, I know it's not the place for me. Plus, I'm giving my trading platform and wallet a good fee for trading and holding it. My only hope is that I wake up in twenty years from now a zillionaire. I doubt it. At least I'm not staking my life savings on it.

For those who do want to embrace crypto, I acknowledge there are some compelling arguments in  favour of Bitcoin as an alternative currency and as a commodity that can help support new technologies, such as smart contracts and more-efficient financial transactions with built-in encryption. If you can pin down what its underlying value should be, all power to you. But if anything, keep it at a minimum. I strongly recommend you read Amy Arnott's thoughts on the subject (of which I've borrowed some) - Does your portfolio need Bitcoin?

Bitcoin

In Firstlinks this week, Graham Hand dissects the federal budget. He examines the consequences of governments believing there are few limits to their spending. With the assistance of Liam Shorte and Lewis Jackson, Hand summarises the major budget changes and differentiates between the superannuation measures for FY2021 and FY2022.

Valerio Baselli rewatches Martin Scorsese’s The Wolf of Wall Street and extracted seven key lessons for investors to keep in mind when dealing with a money manager, broker, or financial adviser, to avoid getting scammed.

SPACs are here to stay, argues Ruth Saldanha. Specialist acquisition companies can fuel bubbles, but SPACs themselves are not bubbles, she says.

Are you caught in a scarcity trap? Fixing an ingrained scarcity mindset requires more than extra money, writes behavioural finance researcher Samantha Lamas.

Could it be second time lucky for WeWork? The office leasing company is trying to float again after 2019's debacle, but this time looks very different. Margaret Giles wonders whether it benefit from the rise in demand for flexible office space.

Alphabet, Facebook remain attractive. The two have already been trading at what Morningstar analyst Ali Mogharabi views as unwarranted discounts compared with their peers.

Lewis Jackson peers under the hood of Australia’s largest sustainable ETF. Despite strong performance and strict exclusion criteria, BetaShares' ETHI includes firms accused of tax evasion.

Preston Caldwell and Aron Szapiro examine how corporate tax hike will affect US equities. The Biden administration's infrastructure plan could mean a mid-single-digit impact on the average equity valuation.

We talk to Adam Fleck on Morningstar’s decision to place a2 Milk under review. Poor growth in its Chinese reseller channel and a glut of stock could force a decrease in the fair value estimate for the infant formula maker.

Boral shareholders should ignore Seven Group’s $8 billion takeover offer for now as it may not represent the best outcome Boral shareholders can ultimately achieve, says Morningstar analyst Grant Slade.

Susan Dziubinski unearths six stocks that let you sleep at night. These wide-moat, low-uncertainty names are reliable, she writes.

Investors priced out of the property market can still attend the ‘capital growth’ party via stock investing, writes Nicki Bourlioufas.

Andrew Willis examines Tesla. If Elon Musk ends up delivering, Morningstar might need to raise its fair value to US$1500 a share.

And finally, in Your Money Weekly, Peter Warnes argues the Coalition’s covid-busting election budget puts surplus into the never never. The Coalition has splashed the cash, but will it be effective and how much will be wasted?

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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