Hindsight is the bane of every investor. “If only …” is what we all say, no exceptions. “If only I had sold my Steinhoff shares before they crashed.” “If only I had invested in this fund instead of that fund.”
We know it’s wise to approach investing as a long-term endeavour and avoid trying to time the markets, yet we continually fall into the hindsight trap.
My latest “If only …” is: “If only I had bought Bitcoin four years ago when they were selling for about R10 000.” I could have retired comfortably on selling them now for about half-a-million rands each. To console myself, I think of the huge capital gains tax bill facing investors who got their timing right.
The problem with cryptocurrency four years ago, as I saw it, was that it by-passed governments and regulators, becoming a safe haven for criminals and money-launderers, and I felt that governments would not take kindly to that.
Another problem was that it was mainly traded as a speculative investment. That led to its high volatility, which continues to this day.
In August last year, I penned a column, “Signs that crypto is coming of age as an investment”, in which I quoted Bloomberg writer Joanna Ossinger, who suggested that Bitcoin showed signs of maturing and stabilising. At that point, Bitcoin was selling for about $11 000. It is now in “bubble” territory: on January 8, it peaked at $40 675 but has since come down by about 25%, to about $31 000. (Considering its volatility, by the time you read this, it could have a very different value.)
So perhaps the article was a little premature, but there is no doubt that regulation around cryptocurrency is mounting, which I believe will have a stabilising effect.
The Financial Sector Conduct Authority (FSCA) has been long concerned about crypto assets, which are unregulated. In November, it published a draft declaration proposing to bring them within the ambit of the definition of “financial product” under the Financial Advisory and Intermediary Services (FAIS) Act.
Natalie Scott, director, and Kyra South, associate at Werksmans Attorneys, note in a recent article, “Crypto assets – a new financial product?”, that the FSCA has identified a number of crypto asset platforms operating in South Africa that “are estimated to have 800 000 registered South Africans, control 80% to 90% of the market and hold R6.5 billion in assets”.
The perils faced by holders of cryptocurrency on unregulated platforms were recently highlighted in the dramatic unfolding of the Mirror Trading International scam, in which holders of Bitcoin handed over their crypto to be “invested” in forex trading, at a laughably unrealistic return of 10% a month.
The FSCA’S intent is that platforms that deal in crypto assets must be registered under the FAIS Act as financial services providers. This move has been welcomed by law-abiding crypto providers, and it will go a long way in protecting consumers. However, Scott and South say that the FSCA “is at pains to clarify that the classification of crypto assets as a financial product does not in any way legitimise the asset class and is not intended to influence how crypto assets are treated under any other South African legislation”.
The New Gold?
Wiehann Olivier, partner and digital assets lead at accounting firm Mazars in South Africa, suggests that the current high price of Bitcoin is precisely because it is unregulated. In an article “Is Bitcoin the new gold?” he says – and Ossinger also made this point – that unlike in the early days of Bitcoin, institutional investors, such as retirement funds, have entered the fray.
Olivier says institutions appear to be using Bitcoin, as they have used gold in the past, as a hedge against the devaluation of traditional currencies and other asset classes.
He says the Covid-19 pandemic has created an “almost perfect storm” in which governments and central banks are under pressure to make certain controversial decisions to best manage their economies.
“Not everyone agrees with these decisions. This created a motive for investors and institutions to move their wealth away from regulated currencies and asset classes to a freer market,” he says.
Olivier says crypto is not yet trusted to be a store of value to the same extent that people trust gold, although this appears to be changing. “Gold has some industrial use, but it gets its value from others believing it has value. Once this inherent belief in something’s value is diminished, any ‘bubble’ associated with it is said to ‘burst’ or result in hyperinflation, which has been witnessed several times in recent history.
The same principle applies to Bitcoin: once more people believe in Bitcoin being a store of value due to its shared and improved characteristics to gold, it will ultimately lead to an increase in demand and an increase in its value. If that inherent belief disappears, the bubble will burst,” Olivier says.
Will impending regulation solidify or shatter that belief? I leave it to you to decide…
This article by Martin Hesse first appeared in The Saturday Star