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Stay Away From Crypto Investment?

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While there are substantial views talking about crypto investment, especially views about cryptocurrency and blockchains are the future of financial services, disruptive fintech, potential lucrative returns and many more about the bright side the asset class.

However, what are the cons and risks, and should you invest in it?

Gambling, Speculating, Trading or Investing?

First and foremost, we must ask ourselves what are your objectives in crypto investment. Are you coming from the angle of financial planning? Which means that it serves as a tools to fit into a portfolio along your journey to achieve your financial objective such as retirement or child education.

Or, are you investing merely to earn fast money? Or, are you merely speculating. Speculating Trading is an active income and it merely cannot categorised as investment. Many people actually confused between trading and investing.

Between speculating and gambling, there are also many similar characteristics. Thus, in other words are you ‘investing’ into Cryptos for ‘gambling’? 

In this modern world where public are generally getting more educated compared to the post-war era, there are least people going for the conventional gambling, but diverting into so-call speculative financial markets to ‘gamble’, yet seems above the class in eye of the public.

Conventionally, when a person is betting on horse racing, they will tell you all sorts of stories and logic in regards to horse riding. Hence, when a person is speculating on Cryptos, they may tell you all kinds of fintech and futuristic tech stories about blockchain or even the recent hot topic of Metaverse and NFTs.

In conventional gambling, there are licensed casino and the underground operators. Why do some governments grant casino a license then? Of course, there are many reasons, but probably few of the common reasons are due to profit making, demand and the need to safeguard public interest thru monitoring and control.

Would it be some similar reasons where many regulators or some financial institutions started to involve in Crypto business recently?  Trading or investing in Crypto may incur significant level of risk, worst still if using unregulated or unlicensed platform.

‘Gambling’ is a bad habit across human civilization. Thus, one had to be aware that is he gambling, trading or investing.

Myth Behind Decentralisation

‘I like freedom!’

These might be the voice from many people especially the young ones. Indeed, everyone wish to have freedom. Some level of freedom is good for overall mankind living. However, would it be disaster behind ‘unregulated’ freedom?

Nobody like to be controlled. However, if you are living in a location which there are no government in place, what would be the scenario? When there are no effective government, there are mafia around. In another word, mafia may be controlling the area. Is it a safe place to stay?

Behind decentralisation, government may have great challenge to control their monetary policies.  If we would imagine that our human body live because of blood as blood carries all the oxygen, nutrients etc to every part of our body in order to keep us alive while the brain is the regulator regulating the blood, then money is medium similar to blood that keep a country alive while the regulators act as ‘the brain’ to regulate.

Thus, every Central Banks and Government are working hard to keep their monetary policies in place and in control.  Some may argue that blockchain technology in the Crypto can actually play the role of transparency and some kind of ‘self-governed’.  Indeed, blockchain is a great technology for financial services. However, many people may be confused. Cryptocurrencies and Blockchain are totally two different matters.

As of March 2022, there are approximately 87 countries are exploring into issuing Central Bank Digital Currency (CBDC), according to the Atlantic Council. While CBDC may adopt blockchain or Distributed Ledger Technology (DLT), CBDC differs from Cryptos as CBDC is legal tender and backed by a claim on the central bank unlike Cryptos that are not legal tender and have no intrinsic value.

Bank Negara Financial Sector Blueprint 2022-202 stated that Bank Negara are exploring into CBDC thru a multi year exploration starting with Phase I via Project Dunbar.

Diagram : Comparison of CBDC, stablecoins and non-backed digital assets

Source : Financial Stability Board (2020), “Enhancing Cross-Border Payment System : Stage 1 Assessment Report to G20”

Crypto As Future Legal Tender?

According to BIS Annual Economic Report 2018, crypto currencies with decentralised trust model, such as Bitcoin, each user needs to download and verify the history of all transactions ever made. This has the effect of slowing down transaction processing time, making it not scalable to facilitate day-to-day retail payments.

Compared to major international cards networks which able to process 2,000 to 3,500 transactions per second, Bitcoin is only able to process 3.3 transactions per second. Most Cryptocurrencies are not likely to be used as payment instruments primarily because they do not exhibit the universal characteristic as money. 

Due to price volatility, vulnerability to cyber attacks and lack of scalability, they are not a good store of value, payment method and medium of exchange.

Scarcity, Really?

People used to describe Bitcoin as Digital Gold as there are only a maximum capacity of 21 million coins in Bitcoin. Thus, it is said that Bitcoin has a unique feature of scarcity.  Many people seems to illustrate the scarcity of Bitcoin to Gold.

There are limited supply of Gold in our planet. However, gold exist and play its role in mankind civilization since the ancient era as precious metal, jewelries, commodity, mean of storage of value, medium of transfer, barter trade, technology components, currencies etc.  It is kept by government and central banks as reserve. 

Gold are natural resources and does not created by human being. Thus, there are no other type of gold in existence. Cryptos are created by human being and there are more than 19,000 cryptocurrencies as to date.

Thus, ‘Scarcity’ is it for real then? Thus, it might not be accurate to compare cryptocurrencies to gold in terms of scarcity. 

In short, one have to be clear about their objectives in investing into crypto. Is he or she gambling, speculating, trading or investing in crypto? Due to numerous uncertainty in regards to crypto market, one had to be very careful while placing their hard earned money into crypto investment.

About the Author

John Chan Ninyii
FAR CMSRL BEng RFP ShRFP MBA PJM
CEO of YES Financial Sdn Bhd
Bank Negara Approved Financial Adviser
Securities Commission Capital Markets Services Licensed Firm
Email: john.chan@yesfinancial.co

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