Should Retail Investors Ride The Crypto Wave?

Here’s a thumb rule – when your kirana store owner asks you about a certain asset class, it’s probably time to exit. This happened with equities during the heady highs of 2008, with real estate a couple of years later; and it’s happening with Bitcoin now.

And yes, the incessant advertisements by crypto exchanges during live cricket matches aren’t helping too much!

It’s natural to have a healthy curiosity about an asset class when it’s gone up the way cryptocurrency has; but remember – just because something has gone up in price, doesn’t mean it will continue doing so. Let’s not forget that a single tulip bulb sold for as high as $ 750,000 (in todays terms) back in the 1600’s. A lot of smart people were reduced to penury when that trend retraced!

Here’s the truth about cryptocurrencies – nobody really understands it, but a lot of people are buying it just because others are buying it. Incidentally, that’s the classic definition of a bubble.

I daresay that cryptocurrency isn’t backed by very strong fundamentals, either. Just “being scarce” doesn’t make something valuable. It also has to have a degree of acceptance and utility. Neither is Crypto widely accepted in place of fiat currency; not does it have any particular utility per se – for instance, it cannot be smelted into jewellery like gold can.

There is also a peculiar paradox in play. For Crypto to replace fiat currency, it needs to stabilize (a no brainer). If is stabilizes, all the speculators and a lot of so called “hodlers” will begin dumping it at a certain point. What then? One can only wonder.

The fact that Crypto isn’t popular with the powers that be isn’t going to help matters either. Most Governments are not pro-crypto, viewing them as a threat to their fiat currency and their monetary control systems. Will Crypto be able to survive a sustained backlash from global governments? Will there really be a time in the future when the USD, the INR et al will just cease to operate, and we’ll all be buying and selling stuff using BTC and ETH? It would be very surprising if that situation were to ever come about.

What should you, as an investor, do? Well, dabble if you must – you may just end up making some quick money if you’re fortunate. But remember, it isn’t “investing” by a mile – it’s pure “speculation”. Only put in what you can afford to lose in entirety. Allocate the rest into tried and tested assets such as equities, fixed income securities and gold. The world as we know it isn’t going to change anytime soon. Don’t overexpose yourself to something that even most professionals only pretend to understand.