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ECONOMY| 01.07.2021

Six warning signs that you should distrust bitcoin and other cryptocurrencies

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The first recommendation for those deciding to invest is never to invest more than you can afford to lose. And, in all circumstances, investors should have the patience, common sense and financial training to protect their savings. 

Alberto Matellán, Chief Economist at MAPFRE Inversión, sets out six warning signs for young people and private investors in general about the risks of acquiring bitcoin and other cryptocurrencies. “Recent developments show that it is more like a bet than an investment,” he sums up. “Many of the rises that bitcoin and other cryptocurrencies have experienced comply with the bubble pattern”. “Buying bitcoin and other cryptocurrencies is more like a bet than an investment”.

 

1. Bubble pattern

Matellán explains that there are many ways to define a bubble. “For me, it is an asset price that only rises due to the expectation that it will rise further. And many of the rises that bitcoin and other cryptos have experienced in their recent history comply with this pattern. That is why, with no demand for these currencies for more concrete reasons, they also suffer dizzying falls, as experienced in the weeks following the warning, this time from the Bank of Japan, regarding their extreme volatility and speculative nature.” 

2. Hanging on expectations

Another reason not to invest in cryptocurrencies is that these movements are not of a strictly economic nature, “but are dependent on commentary, rumors and largely ‘extrinsic elements.'” According to Matellán, at the end of the day, they can be summarized according to the expectation of how publicly accepted the bitcoin or the currency in question will be. But, he warns, “That lends itself to gross manipulation, since there is no monetary or fiscal authority to support it.”

3. Fashionable refuge / ‘Covid refuge’ 

In recent times, the stampede has been widespread, and even Elon Musk, initially a defender of cryptocurrencies, no longer accepts them as a means for customers to pay for his famous Teslas. On the day this was announced, digital currencies plummeted more than 15 percent. The People’s Bank of China, the European Central Bank (ECB), the Federal Reserve (Fed), and now Bank of Japan Governor, Haruhiko Kuroda, insist—to varying degrees—that this is a bubble. Cryptocurrencies are a fashionable refuge that has become even more fashionable with the outbreak of coronavirus, but that might not feather its nest further if you consider Buffet’s critique in his day when he said that cryptos are risky and worthless. JP Morgan has warned that the correction in the price of bitcoin may be dramatic.

4. Hasty decisions and bad advice

No one can escape the fact that cryptocurrencies have been particularly attractive to young people who, unlikely to invest in gold and often new to the intricate world of investment, are perhaps more attentive to a media frenzy. According to a recent study by Charles Schwab UK’s Investment Forces, the 18–37 years demographic are now more likely to trade cryptocurrencies than equities. They are in a hurry: According to the same report, eight out of every ten young investors claim that the economic situation has made it difficult to achieve good returns. They are not the only ones who take this view, given that companies around the world have added bitcoin to their balance sheets.

5. Lack of financial literacy

What Schwab’s report also demonstrates, warns Matellán, is not that young people prefer to invest in cryptocurrencies, but that “They don’t know what it means to invest because no one has taught them how to do it.” The best antidote to bubbles, Ponzi schemes—a scam that attracts investors and pays out profits to earlier investors with more recent investor funds—and other traps for the unwary, is financial training, preceded by common sense. “And common sense often goes hand in hand with personal maturity,” he stresses.

6. A dislike for the authorities

In the opinion of MAPFRE Inversión’s Chief Economist, this element may give bitcoin and other cryptocurrencies “an aura of rebellion” that makes them attractive to young people, but the truth is that the authorities are vetoing their use. For example, China has recently been taking action against cryptocurrency mining centers. Furthermore, they do not allow for freeing up debt or tax payments in any developed country, so they cannot be considered an asset as such.

The future of digital money

Matellán insists that this does not mean that digital money cannot have a future. “In fact, it is very likely that, in a few years, we will be handling digital money alongside traditional money. This is very different from a cryptocurrency, however, mainly because I understand that the former has the backing of an authority or regulator, while the latter is only dependent on user confidence. The argument that a central bank can issue a lot and that cryptocurrency is limited is also not valid, because other competing cryptocurrencies can be created,” he warns.