Consultants, bitcoins, and customers
The success of bitcoin, which has affected all market players, is raising questions among retail investors about how, why, and how to position themselves in the cryptocurrency. Certainly, the fluctuations have sent a clear signal to investors about the volatility of the asset and its latent risks/opportunities. Given the extreme volatility of bitcoin, customers who are convinced they want to own it could be told to dedicate no more than 1% of their portfolio to any cryptocurrency (or no more than they can afford to lose). In addition, owning a small amount of cryptocurrency could be useful as an educational exercise: it is a way to encourage customers to delve into cryptocurrencies, assess their true tolerance for risk, and observe reactions to high levels of market volatility. Capital Group experts have compiled a list of key points to keep in mind when approaching the digital currency market for the first time:
• Be aware of the risks. As with any investment, even that in bitcoin involves a series of risks, some of which are more significant (high bitcoin denomination, impractical to use as a medium of exchange, limited availability);
• To extract (today) means to pollute. Bitcoins can be mined using high-powered computer systems: cryptocurrency mining activities consume approximately 0.6% of the world's electricity (source: Bitcoin Electricity Consumption Index managed by the Center for Alternative Finance of the University of Cambridge);
• Notoriety and regulation. Authorities are unlikely to allow unchecked investment to spread (lawmakers around the world may decide to make the use of Bitcoin more difficult: Bitcoin aims to replace sovereign currencies and, if allowed to increase, it could reduce the ability of governments and central banks to control monetary policy and tax profits and wealth);
• No central authority, no assistance. The risk of theft and hacker attacks on the digital wallet remains, and since any central authority does not control bitcoin, there is no one to contact for assistance;
• Carry negative. Under normal market conditions, investors are reimbursed in interest for holding a certain amount of currency. This does not apply to bitcoins, which could represent a loss of interest in terms of interest (such a condition is a negative carry call: investors can lose money simply by holding the asset);
• Cover role not verified. Bitcoin is not always a hedge against equity risk. A widespread idea among crypto supporters is that it would protect in periods of downturn in the stock markets (although this sometimes occurred, in the period of the collapse of March 2020, it did not act as an effective hedge). It is not yet clear if and how bitcoin can act as a hedge, and investors should be careful not to make too many assumptions about its behavior in different market contexts;
• The value of the blockchain. The underlying technology of cryptocurrency powers the ledgers (they are created from transactions, approved by network participants, and recorded as blocks of information. As more blocks of transactions accumulate, they are securely chained to older transactions. These data chains can be shared and expanded by trading partners, providing a simpler and more efficient way to manage digital (financial) transactions that can be shared over public or private networks and track transactions;
• The Initial Coin Offerings "ICO", is the initial coin offers. They are a way for companies to raise money for their business using cryptocurrency. The proceeds finance new projects, while buyers receive tokens (tokens: they resemble points collected in loyalty programs) that can be exchanged or used to purchase goods and services from the issuing company. Such innovations could change the way businesses raise money and expand the universe of companies to invest in;
• Unexplored markets. In some cases, the new possibilities are still unexplored, especially in some parts of the world. The attractiveness of cryptocurrency tends to be greater in countries with less stable currencies (eg El Salvador).
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