As Bitcoin and other cryptocurrencies are again skyrocketing on financial markets, investors in Developed and Emerging Markets, like the Philippines, should be wary of the potential dangers of investing in these types of assets.
Bitcoin is still a very young market, and its peculiar digital and intangible nature makes it hard for investors to ascertain its value with standard valuation methods. In this sense, Bitcoin looks more like a commodity than a stock investment, given that there are no future dividends or future cash flows that can be used in valuation.
In this very volatile phase in financial markets, some people are arguing that the run of Bitcoin signifies that investors are starting to see the asset as an alternative store of value, possibly in the same league as gold or silver. Even so, analysts have struggled to find reasons behind Bitcoin’s recent rise. The path of Bitcoin prices is at the moment closely following what happened at the end of 2017, when Bitcoin more than doubled in value in a very short period of time, with no clear catalyst behind the rise.
Investing in Bitcoin still entails quite a bit of costly and time consuming transferring and conversion of currency into cryptocurrency through Bitcoin wallets, with all the security risks of the case. Readers are probably aware of the situation of a man allegedly holding more than $220 Million worth of Bitcoin who cannot remember the password of his wallet and will probably end up losing the entire sum.
Another similarity to the “bubble” of 2017 is that Bitcoin is still not accepted for a majority of a transaction and institutions, and it is still under the threat of serious regulation from Governments and Central Banks. Seen in this light, the increase in Bitcoin value in recent months is mostly based on the hope of future wide adoption, perhaps fueled by the loss of faith in traditional currencies that have seen massive issuances to fend off the Coronavirus Crisis. Although some Bitcoin “ATMs” can be seen in some cities in the United States and in some Asian countries, these are mostly just charging very high transaction fees that benefit the owner of the ATMs against the client.
The latter issue, which is the prospect of making a lot of money off the interest of financially illiterate people for Bitcoin, is probably what is driving the renewed interest in cryptocurrencies from major investment banks around the World. By building a trading infrastructure for cryptocurrency, investment banks can act as “toll collectors” by earning fees on any Bitcoin transaction, regardless of the movement of the Cryptocurrency. It is, therefore, no surprise that banks and financial institutions are suddenly again interested in Bitcoin and do not dislike the renewed notoriety of the asset.
It is no secret that investment banks have had a very strong quarter despite the pandemic (Q4 2020), with most profits coming from their trading departments. By expanding their markets into Bitcoins, banks would prey easily on naive investors in search of easy money.
Therefore, investors in emerging markets, like the Philippines, and Developed markets should be wary of investing in cryptocurrencies and should never risk losing more than they can afford. Investors should also look for cheaper alternatives to invest in cryptocurrencies, like low fees regulated funds (of which very few currently exist) and alike.
To conclude, Bitcoin remains a very speculative investment, backed for now by little more than the faith that its value will rise in the future, a shaky investment thesis for any investment idea. People interested in the asset should perform proper due diligence and ask for the advice of experts, avoiding chasing returns for the sake of speculation and easy money.
If you are interested to learn more about buying Bitcoin and other cryptocurrencies in the Philippines check out this article.
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