Cryptocurrencies deserve no place in an investment portfolio

Much has been written on the rise, and subsequent demise, of bitcoin. For investors, it’s been luck of the draw with spectacular gains, and the possibility of instant riches has been too good for too many investors to ignore.

Many have jumped on the bandwagon, with little education and little experience.

But there have also been spectacular losses. With very little rationale behind the sharp movements in valuation, and the lack of governance and regulation, it is hard for investors to know what they’re up against.

So why are so many investors lapping up cryptocurrencies as part of their investment portfolio? Arnie Selvarajah looks at alternative options for investors, and why slow and steady wins the race.

High risk, high reward?

We can immediately see that the very nature of cryptocurrency ‘investments’ – high risk and complex products — are not aimed for the everyday retail investor and can be a trap.

Until recently, cryptocurrencies were not regulated, meaning investors had no guarantee of safe, honest trading.

And it’s not just cryptocurrency investments. Investors are bombarded by investment options offering them a quick and high return. Binary options, contracts for differences (CFDs), financial spread betting, are all made readily available to ‘trade’.

Investors are essentially betting on whether a market index, currency, commodity etc, will trade above or below a specified price, at a specified time in the future. A high risk speculative investment, unless the investor is following the market carefully, is really just a gamble or a bet.

In the EU, The European Securities and Markets Authority (ESMA) has put stricter measures in place around binary options and CFDs, to protect investors, because of their complexities. ESMA wants to guarantee greater investor protection by ensuring a minimum level of protection for retail investors.

It has prohibited marketing, distribution and sale of binary options to all retail investors, and restricted marketing, distribution and sale of CFDs to retail investors.

However, the US has taken it one step further and banned both. The SEC has the view that CFDs are over-the-counter products and therefore cannot be regulated.

Enter the tech giants

Investing is made attractive and easy to do, through social media channels, with many people claiming to be experts, and targeted advertising reaching many.

Google has announced that it will block all advertisements related to cryptocurrencies these type of derivative products from June 2018. This includes forex, financial spread betting, and unregulated CFD trading, and across crypto, initial coin offerings (ICOs), virtual wallets, and trading advice.

Google lists cryptocurrency ads under its “emerging threats” banner, despite the rising demand for digital money. The company had banned 320,000 publishers from its advertisement network in 2017, but it blacklisted nearly 90,000 websites and 700,000 mobile apps. It also removed legitimate ads from two million individual pages each month that violated its policies.

It’s a move that has seemingly surprised the industry, but is a much-needed layer of protection.

Businesses like Google – also including Facebook and Twitter — are charging ahead with making the much-needed change, ahead of the regulators who seem to be unable to keep up.

Slow and steady wins the race

For investors, it’s important to remember: if it sounds too good to be true, it probably is.

Any product or offer flagging excessive free trading, outrageously high returns (above 25% should raise some alarm bells), always winning against the market, making money from currency trading, an opportunity that’s too good to miss – avoid.

If it’s all over the media, it’s very likely the investment is in a bubble. Bitcoin is a prime example – high risk, and should be nowhere near an investment portfolio.

Any credible provider not wanting to put their clients in harm’s way would not offer these products.

What still rings true is the old-school style of portfolio creation — a diversified mix of assets — shares, property, fixed income etc — as well as risk, mixing some that have a higher risk while offsetting with some that have lower short-term volatility.

Would you consider listing your Melbourne Cup bets or your Footy Tipping competition in your SMSF portfolio as an asset?

While there’s new vehicles, i.e. ETFs, LICs and mFunds, the underlying asset classes remain the same.

It may sound boring, but slow and steady wins the race – this couldn’t be truer for creating and managing a long-term investment portfolio

It’s best to leave the more risky asset classes, like cyptocurrencies, to the experts.

This article was first published on Nestegg.com.au.