What is cryptocurrency?

Volatile. Lucrative. Speculative. Futuristic. Nothing quite divides market opinion like cryptocurrency, a digital asset that works using blockchain technology. The decentralised system involves millions of computers validating and recording every Bitcoin transaction on the blockchain. This provides security as it is impossible to tamper with any data that has already been written onto the blockchain.

There are over 10,000 different types of cryptocurrencies, with a staggering total market value of over US$1.5 trillion. While Bitcoin makes up the lion's share, there are others like Ethereum, Dogecoin and Tether.

There are three ways to get cryptocurrencies: buy it with money; sell an item for it; or mine it with a supercomputer by solving extremely complex math equations.

The asset has been on a wild roller-coaster ride over the past year. At around US$2,000 today, the price of Ethereum - the second-largest cryptocurrency on the market - has soared almost ten-fold from June last year. Bitcoin itself is up by almost 250 per cent to more than US$30,000 over the same period.

Millennials, in particular, have been fuelling the crypto boom, attracted by its attributes. The asset is easily accessible, highly attractive as an investment compared to bonds or properties, and transparent. Some also like the fact that neither a government nor a bank controls it.

Its use is increasingly going mainstream. PayPal now allows its users in the United States to buy, sell and hold certain cryptocurrencies. El Salvador became the world's first nation to adopt a cryptocurrency, following the approval of a law that will classify Bitcoin as legal tender. Closer to home, some consumers in Southeast Asia can use cryptocurrency to even purchase property.

Yet, for many observers and investors, the jury is still out on whether cryptocurrency is something to get into. The question to ask is this: Are you making a calculated decision, or are you getting swept up by the current frenzy?

 

Making the right bet

Because of their speculative nature, cryptocurrencies can be highly volatile and risky as investment products. Musk's influence on Bitcoin is a good example: His changing stance on Tesla accepting Bitcoin in payment has caused wild swings in the cryptocurrency over the past few months.

While El Salvador has legitimised cryptocurrency, other countries have repelled it. In May, China banned its financial institutions and payment companies from crypto trading, and the United States is currently exploring measures.

In April 2021, Singapore's Senior Minister and Monetary Authority of Singapore (MAS) chairman Tharman Shanmugaratnam outlined the central bank's stance in Parliament: They are highly risky as investment products and hence not suitable for retail investors. MAS has issued numerous consumer advisories to warn the public of the risks of trading in these products.

One major flaw of cryptocurrencies is that they do not have intrinsic value, mainly because of their inability to generate any earnings. They also do not have a proven relationship with economic fundamentals, which makes them difficult to analyse.

Maybank Group Wealth Management finds little evidence to prove cryptocurrencies' effectiveness as a portfolio diversifier or inflation hedge. The heightened price volatility also limits their usefulness as a haven asset and/or as a store of value.

Given the high risk, investing in cryptocurrency should be made only with money that you can afford to lose. Investors must also be wary of the potential for scams and crypto's association with vice and crime.

In addition, one should be aware of the potential regulatory tightening and environmental concerns. For instance, mining Bitcoin is a major energy sapper, with an annual carbon footprint currently equivalent to that of Argentina's.

Investors should thus exercise extreme caution when investing in cryptocurrencies. With their future very much uncertain, vigilance is key. Equip yourself with the best knowledge and proceed with prudence. You would not want to have your heart broken.