Many retail investors are drawn to the hype of investing in cryptocurrencies as they believe this asset class, which is aggressively marketed as a phenomenal wealth creation tool, fulfils “get rich quick” dreams.
Bitcoin is the best known and largest of the 1,600-odd cryptocurrencies. The US$140 billion market capitalisation of Bitcoin is even bigger than the famous McDonald’s (Ticker: MCD) of US$129 billion. The meteoric rise of Bitcoin has drawn many investors, with some believing that the underlying blockchain technology could become one of the most powerful tools in the future financial world. No doubt cryptocurrencies may change the financial world in future, but this asset class may not be suitable to everyone due to the underlying risks. The following are the 3 No-No reasons if you are investing in cryptocurrencies for your retirement planning.
1st No-No – Valuation
There is no intrinsic value of a cryptocurrency. A bitcoin has no proper valuation method or intrinsic value and it is not backed by any tangible asset – unlike equities which can be valued by their earnings using PE (Price-Earnings) Ratio or valued by future cash flows via the DCF (Discounted Cash Flow) model; bonds by future coupon pay-outs; property valued by rental income or comparative method by location; and commodities’ prices determined by the actual demand & supply. No one can determine what the actual value of a cryptocurrency is. Should Bitcoin be worth US$100,000, US$1,000, 10 cents or be worthless? As there is no measurement to help you value the cryptocurrency, there is no way you can judge whether you are buying at over its value, below its value, or throwing your money away if the Bitcoin becomes worthless one day.
2nd No-No – Safety
There is no central bank, government or financial authorities, such as custodians, registries, and the like, to protect investors. Investors mainly depend on their private keys and digital wallets to safeguard their own coins. For instance, if the investors forget or misplace the login details of their private keys and digital wallets, there goes all their investments.
3rd No-No – Transferability
Transfer of the money, buying & selling at different exchanges, keeping different coins in different digital wallets and exchanges can be a very daunting task to most people. For example, investors have to transfer cash from our banks through XFER to Coinhako, buy Bitcoin and transfer to Bittrex / Bitfinex (exchanges), then sell Bitcoin and buy Ripple (XRP). If investors want to take profit from XRP and return the cash back to their bank savings account, they will have to reverse the process. Every transfer involves cost and the transfer can go MIA (Missing In Action) if the investors are not clear about what they are doing.
Blockchain may very well be one of the technologies of the future, but this alone doesn’t warrant investing in cryptocurrency, especially for something as crucial as retirement planning. The risk of “losing everything” is just too high to take if something goes wrong. Building a diversified investment portfolio with traditional asset classes is still a safer way to build up your retirement fund. Don’t forget, you can also talk to a Financial Alliance representative in order to get the best retirement plans to suit your needs.
Kenny Loh is a Senior Consultant of a largest Independent Financial Advisor in Singapore. He won 4 Awards in 2017, Financial Alliance Quality Class Merit Award, Top 5 Investment Asset Under Advice (AUA) Award, Rookie Consultant of the Year Award and Best Practice Consultant Award. Visit his personal profile here. https://fa.com.sg/kennyloh/