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Downfall of cryptocurrencies

The hype you can get into when it comes to cryptocurrencies is huge. After all, you keep hearing and reading about digital millionaires, quick profits, cryptocurrencies as a store of value. Countless ads on the “Magical Internet Money” advertise “passive income”, “fully automated crypto trading systems”, “returns between 10% and 45% per year!”. Bitcoin, Ethereum, Ripple, IOTA and similar word creations get stuck in your head and create the desire to want a piece of this pie, too.

So far, so human. Especially after Bitcoin’s price explosion in December 2020 and the seamless continuation of the rally in January 2021, many investors believe it’s a bet that you can only win -- and grab it heartily. If the prices fall, so much the better, then even more will be bought. Forecasts are now rife that the digital currency could even rise to 250,000 euros. As Gordon Gecko said in the 1987 film Wall Street, “greed is good,” so what’s the problem?

Translated with www.DeepL.com/Translator (free version)

Greed makes blind

The problem is easy to describe, because greed sometimes makes you blind. As we have seen in numerous conversations, many investors simply close their eyes and hope that things will go well. Firstly, however, hope should not be a criterion for an investment, and secondly, very few people have become rich by doing so.

The fact is: the risk of loss is enormous. If you buy digital currencies or speculate on digital currencies with certificates, you should be aware that you are entering a shark tank. The prices of these investments fluctuate strongly, quickly, sometimes not comprehensibly and can lead to total loss. Time and again, digital currencies also come under pressure because hackers have emptied a platform and thus committed theft on a modern scale. If you have nevertheless succumbed to the appeal of this form of investment, only invest capital that you can do without if the worst comes to the worst.

It is also a fact that a large number of cryptocurrencies that have seen the light of day in recent years have already disappeared from the market. Over 1,800 (!) digital currencies are dead and the money invested in them will never see their investors again. This shows impressively: many cryptocurrencies do not manage to establish themselves permanently on the market. What is particularly worrying is that about 700 of the dead cryptocurrencies were apparently traded for fraudulent projects by criminals. Thus, speculating on digital money is like going to a casino. There, too, the total loss of your invested capital is imminent.

Does an investment in digital money make sense?

An investment in digital money is, let’s call a spade a spade, an investment in hot air. Because: there is simply no real value behind it. No company buildings, no fleet of vehicles, no sales, no profits, no interest, and no payout. The fact that cryptocurrencies are not regulated by financial regulators should also give any interested party pause for thought. As of today, cryptos are not real currencies, are not legal tender, and are therefore primarily objects of speculation. Where high profits are tempting, fraudsters are usually not far away. Onecoin is cited here as an example of a presumed digital currency, but it ultimately turned out to be a Ponzi scheme and caused damage of over four billion US dollars.

Bitcoin, or BTC for short, is often referred to as the mother of all digital currencies and is the clear number 1 among cryptocurrencies in terms of market capitalization. It does not exist in the form of coins or bills; it exists exclusively virtually. Apart from the sometimes irrational price fluctuations, it nevertheless has an enormous appeal, especially for the younger generation. This is because instant transactions can be carried out via so-called lightning networks. First, these transactions take place at speeds of less than one second. Secondly, the sender and recipient are independent of the provider, i.e. without the intermediary of a bank, credit card company or other payment services such as PayPal. Thirdly, the data associated with the transaction is reduced to an absolute minimum and privacy is much better protected. However, energy consumption increases with virtual payments due to the technical requirements. The German Bundesbank has calculated that a single Bitcoin transaction is equivalent to the monthly power consumption of a single-family home. So bitcoin can hardly claim to be environmentally friendly, sustainable or green.

Even though cryptocurrencies cannot have any intrinsic value: Central banks and governments have recognized that a certain trend exists. The Libra launched by Facebook has done its bit to make virtual currencies not yet socially acceptable, but at least a hot topic of discussion. The European Central Bank is testing a digital euro and plans to decide on its introduction in the summer of 2021. However, it will not replace cash, but initially only supplement it.

What does all this mean for us as asset managers?

Generations Y, Z and Alpha will sooner or later test alternatives to the established currencies simply because of their natural technological affinity. You don’t have to be a prophet to imagine that digital currencies will sooner or later find their way into our world. This is another reason why we are constantly monitoring developments in this area and are in close contact with experts. It is important that clear rules exist to create (legal) security and transparency for investors. Until then, however, many digital currencies will end up in the graveyard and cause high losses. We will stay on the ball and keep you updated.

PS. By the way, if you think big providers grant big security: With Ripple, the third largest provider was under heavy fire in early 2021, several crypto exchanges (including Coinbase, Bitstamp and Crypto.com) had suspended trading with Ripple -- and thus any possibility to sell shares. Once worth 26 billion US dollars, Ripple was under heavy fire…

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