14 December 2018

Stephen Furness

Director - Wealth Management

Twelve months ago, I penned an article exploring cryptocurrencies, more specifically Bitcoin. At the time, cryptocurrencies had exploded in popularity and the value of Bitcoin and other digital currencies soared. Everyone was talking about it. Many high profile investors and commentators were drawing parallels between the rapid rise of cryptocurrency prices and famous economic bubbles we have experienced in the past.

Now, twelve months later, we thought it worth reflecting on how cryptocurrencies have fared.

 

Last December, the cryptocurrency market cap sat above $500 billion.

Last December, the value of Bitcoin exceeded $20,000.

Last December, there was little to no regulatory oversight of cryptocurrencies.

 

What’s happened in the twelve months since?

 

Today, the cryptocurrency market cap has plummeted to $105 billion.

Today, the value of Bitcoin has dropped to less than $4,000.

Today, there is little to no regulatory oversight of cryptocurrencies.

 

A risky game

Cryptocurrencies are very young. Despite Bitcoin’s launch nearly a decade ago, regulators are still, unsurprisingly, playing “catch up”. There is little clarity or coordination in terms of regulatory, financial, tax or legal treatment of cryptocurrencies. There are no clear consumer redress or compensation systems in place. This lack of regulatory oversight means investors are afforded very little protection from the litany of risks associated with cryptocurrency investments.

Whilst Australia is making some progress towards regulating cryptocurrencies (for example, Anti-Money Laundering and Counter-Terrorism Financing laws have been amended to cover Australian digital currency exchanges), the regulatory framework is still being built.

It’s not there yet.

 

MGD Insight

There are a number of considerations that should always play a role when it comes to making good investment decisions. Will this investment help me achieve my personal and portfolio objectives? How does this investment fit in my overarching portfolio? How does this investment work? What behavioural biases could be playing a role in this decision? Do I understand the risks of this investment?

Regulatory oversight and due diligence are critical when it comes to investment decision-making because a lack of standards and regulations means investors are faced with significant risks and little to no protection. Regulatory oversight is key to ensuring investor protection, guarding them against malpractice and providing much needed clarity to a fast-maturing industry (such as cryptocurrencies). Weaving proper due diligence practices into investment decision-making will enhance investor returns over the long run.

When all is said and done, if cryptocurrency is a good investment opportunity then it won’t go away. But it will become more secure and investors will become better protected as governments and regulators get a grip on the cryptocurrency market. But it’s just not there yet. Like our global financial system, clarity, coordination, governance and oversight can go a long way in eschewing the risks of new, innovative investments while improving overall market stability.

If you’d like to speak to us in more detail about cryptocurrencies or Bitcoin in particular, please get in touch on (07) 3391 5055 or email at advice@mgdwealth.com.au.

Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.