Back in 2017, when asked about cryptocurrency, I gave my honest answers in this column. In short, buy and read the book Extraordinary Popular Delusions and the Madness of Crowds . There. I could stop now.
In this book there were countless examples of crowds rushing to solutions and ‘investing’ ‘full tilt’ only to find out the tulip bulb they had ‘invested’ into, was, a tulip bulb. Whether it was Tulipmania, the south sea bubble, the Mississippi scheme, the magnetisers, witch mania, or haunted houses, the behaviours are the same, and today, it’s still the same.
One tulip bulb, for example, was valued at nearly $600,000 in today’s terms in 1637. In 1639, Rembrandt bought a superb home in Amsterdam for nearly the price of one bulb. A mart was set up on the stock exchange and Tulip-jobbers (stockbrokers) made money buying low and selling high at the expense of the seller and buyer of course – again today, it’s still the same.
The more volatile, the better. Homes were sold and the cash invested into tulips. Houses were sold at ruinous, ruinous prices as the gain on the tulip (based on a ‘belief’) would make up for it. Until it didn’t.
Cryptocurrency, Non-Fungible Tokens (NFTs), and blockchain are all very different, yet are normally lobbed in together. They aren’t. Don’t invest into them unless you understand them fully and are prepared for any loss.
Crypto has a usage, and a viable usage in terms of a digital currency, but no real store of value. The fact that someone has to ‘mine’ to find an algorithm has no reference to any future value, and just because something is trading at $10 or $50,000 doesn’t mean it’s worth that.
If crypto falls in ‘value’ from $50,000 to $10,000, it doesn’t mean it is cheap, it means that someone paid $50,000 for it before, and they were wrong. If I can teach you anything about value from 35 years’ experience, it’s that if anything can get cheap, it can get cheaper - a whole lot cheaper.
Just because it’s cheaper, doesn’t mean it’s useful - remember Del’s face in Only Fools and Horses where Rodney returns with lots of unusable objects he bought in an auction just because they were heavily discounted. That education was there for us all, but, its only when the pupil is ready that the teacher arrives.
There is a part of your brain called the prefrontal cortex which modulates emotions. When we are highly aroused (fear or greed both work), our logical brain drops into slow motion or stops. We become highly malleable, and our thinking is binary – fight or flight.
It’s this emotional binary thought process that has many trapped when looking at crypto/tulips for that fear of losing out. I’ve dealt with many tax positions in the last five years and none had a gain from crypto in there, so take with a pinch of salt the pub chats on how much is being made.
Remember, the real need at the beginning of crypto was the power to take the money away from central banks and to use your own currency. That’s fine, a good thing, and a good usage, but as for ‘value’. What value would it have if a central bank or government banned it for a ‘reason’? Its value would be gone overnight.
It’s well known that many centralised governments want a digital currency. Britcoin was tabled for around 2025 by Rishi Sunak when he was Chancellor. I’m deeply uncomfortable with the power a centralised digital cashless society could wield in the wrong hands, so would oppose that.
In a previous column, and to those who have asked, I had always said that a build-up of cash in the digital currency arena followed by a crash or corruption would then drive the need for the aforementioned regulation. It would always come, so… enter FTX’s crash and a story that will run.
Bear in mind that blockchain is the great story of crypto and that all transactions are always visible and can never be altered, so finding $1bn of missing money should be easy, right?
No surprise then when Googling ‘FTX crypto regulation’ there are over 27 million results. In no time we will have a call for regulated central crypto currencies, regulated by those the crypto world wanted to leave behind. It was this point I made in 2017 and it remains true today.
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Peter McGahan is the chief executive of Independent Financial Adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
