Cryptocurrency: A Cautious Approach

While cryptocurrencies like Bitcoin are gaining legitimacy among investors, there are still a number of red flags for investors to consider.  

Cryptocurrencies have gone mainstream. After years of being utilised, for the most part, for money laundering, these decentralised digital currencies are now an almost-respectable part of the investment landscape and have gained increased recognition and acceptance as a legitimate means of tender. 

In early 2021, the world’s first Bitcoin exchange-traded fund (ETF) launched; within a week it had more than USD590 million in assets under management. It’s impossible to not get excited – or at least intrigued – by that kind of growth.  

Yet if you speak to a reputable financial advisor about Bitcoin – or any other cryptocurrency, for that matter – the excitement quickly turns to words of caution and risk.  

“We cannot advise on Bitcoin because it is not regulated in South Africa,” says Anthony Palmer, Group Commercial Director at Carrick Wealth. “Even if we could, Carrick is about long-term retirement savings, very well managed from a risk perspective and designed to grow steadily over the medium to long term. Our clients come to us for dependable and consistent returns for their retirement planning. As a general rule, we do not include volatile and speculative plays in our portfolio construction.” 

Volatile is an apt description. In April 2020, one bitcoin was worth about USD6 400 (R57 500). By early January 2021 its value has rocketed to USD40 675 (R616 000); but within two weeks it was down to USD33 000 (R462 000). In March 2021, it was up at nearly USD60 000 (R888 500).   

At the time, US investment bank Morgan Stanley announced that it was allowing access to three funds that enable ownership of Bitcoin, but only to very wealthy clients who have “an aggressive risk tolerance” and at least USD2 million in assets held by the firm – and even then, they’re limiting Bitcoin to only 2.5% of the client’s total net worth. “That’s testament to the fact that Crypto is gaining traction as an accepted asset class and that asset managers are really starting to take it seriously,” says Palmer.  

If, as an investor, you have the stomach for that kind of volatility, surely, it’s worth tapping into that phenomenal growth? Why, then, do some financial advisory firms tell you to steer clear of Bitcoin?  

“We don’t advise investors to steer clear of it,” Palmer clarifies. “What we say to investors is that we can’t give you advice on it as there is no regulation. If you want to invest in Crypto, that’s up to you – but you’d have to do it on your own for the time being. And besides, what would our advice be anyway?  There’s just too much uncertainty around Bitcoin and it’s too speculative at this stage.” 

Unregulated… for now 

Uncertain, speculative… Those are two words that Palmer keeps coming back to. Unregulated is another.  

But that is changing quickly. The South African Revenue Service (SARS) confirmed in March 2021 that it was auditing South Africans who had bought cryptocurrencies in recent years, demanding information about those cryptocurrency holdings. (SARS was quick to point out that bank transfers by a taxpayer to a cryptocurrency platform can indeed be traced.) 

Where does this leave us? “I do personally believe that crypto is going to become another asset class going forward,” Palmer says, “and I would happily add it to our solutions firstly, when it becomes regulated, secondly, when it settles down into a more stable investment and finally once our investment committee has completed the necessary diligence to ensure it warrants an allocation. I would have no problem allocating a percentage of a client’s portfolio to Crypto… but only at that point.” 

Until then, please apply prudence and consider the downside as well as the upside of any investment decisions you make.