Cryptocurrencies are popular. If you’re not a grumpy old guy, you probably already own a lot. Even I, as vulgar as anyone else, own a few.
Last year, the Financial Conduct Authority estimated the number of people in the UK owning cryptocurrencies at around 2.3 million, and given the publicity surrounding the various currencies, it makes sense to think that the number is already slightly higher.
This is confirmed by several surveys. Interactive Investor research suggests that approximately 45 percent of young adults (18-29) made their first ever investment in cryptocurrencies. Boring Money data states that 11 percent of young adults (18-44) claim to own or have owned crypto assets.
Among those who invest – in anything – only a year or less, that number rises to 16 percent. That’s nice, you might think young people are involved in money and markets.
Unfortunately, it’s more complicated. The “alarming number” of new buyers “finances it through a cocktail of credit cards, student loans and other loans,” says Interactive. The FCA survey indicates that 58 percent of people who trade these types of “high-risk products” take “social media and their friends” for advice, a strategy that is not financially successful.
The Ministry of Finance is concerned. She noted this week that while the number of people holding cryptocurrencies is growing, “understanding what a crypto is is actually declining, suggesting that some users may not fully understand what they are buying.”
This can be especially the case if they rely on ads on social networks and the London Underground to obtain information. Consider one of the most discussed of them last year, from Luno Money.
It said in big letters, “If you see bitcoins underground, it’s time to buy.” This did not ease the appeal that you would miss, albeit in very small letters, the information that you would buy a volatile, speculative possible asset that comes with a high probability of capital losses – and this could soon be banned by the Russian government.
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There is a reason why cryptocurrency advertising is now likely to be transferred to the FCA. Such ads will now (like all other financial product ads) have to be “fair, clear and not misleading”. I can’t imagine what crypto advertising will look like in all these things – for example, that it will have no revenue, no obvious basic value and no recognized method of valuation – and yet it will be convincing. There is something to look forward to.
But here’s the question for you. Would more accurate ads change at all? After all, when it comes to misunderstanding how investments work, it’s not just about cryptocurrencies.
If that were the case. Last week, Interactive Investor created the research I loved. I often say here that a retail investor should outperform professionals for the simple reason that we have something they don’t have – time. We are not responsible to anyone for quarterly performances, only to ourselves for our long-term performances. Our retirements rely on us to do more right than wrong.
Therefore, I am pleased that over the last year, the performance index of private investors has shown that ordinary investors have outperformed professionals by several percentage points. Younger investors aged 18-24 have also performed remarkably well in the last two years – 22.8 percent more, compared to 17.2 percent for the current index – a mixed-investment investment association with 40-85 percent of shares.
And the “secret sauce” that drives the proceeds? Higher allocation to investment funds.
So here’s the question. I love investment funds. But do new investors, or in this case older investors who buy them, know what they are buying? This is partly a question of the structure of investment trusts. Their share prices may move a certain distance from their net asset value. You can buy them for an additional fee, which none of the investment platforms warns you about on their trading pages.
You may think that you have bought a wonderful story about longevity, digitization, artificial intelligence, space travel or fossil fuel-free energy. In fact, you may have bought an asset that is extremely sensitive to changes in interest rates
But if sentiment turns against them, you can end up selling at a discount on their net asset value. result? You have lost much more money than the change in the share prices of the underlying holdings of the trust could suggest.
But it is also about what is in them. The top holding for the 18-24 age group is Scottish Mortgage. SMIT holds a lot of amazing and exciting stocks with fascinating stories that you might want to hold for a very long time.
Some now make real money. The others do not. But they promise huge growth and huge profits in the (uncertain) future. These future profits are valued by discounting them with respect to today’s interest rates. The lower the interest rates, the higher the future profits. Thus, the lower the rates, the higher the growth stock prices. That’s one of the reasons – along with a good selection of stocks – is why SMIT has worked so well for so many people.
You will see a problem. You may think that you have bought a wonderful story about longevity, digitization, artificial intelligence, space travel or fossil fuel-free energy.
In fact, you may have bought an asset that is very sensitive to changes in interest rates, or what is known in the business as a long-lived asset, the price of which will change as the discount rate used to value it.
“If inflation occurs – or rather looks like a real possibility,” Ruffer Jonathan Ruffer said a few years ago, “you won’t see government bonds or technology stocks just for dust.”
So here we are. European stocks outperformed growth stocks by almost 10 percent in the first 17 days of 2022, and US stocks are up 6.4 percent this year, says Duncan Lamont of Schroders. Goldman Sachs’ unprofitable technology index fell 14 percent from its peak earlier this week.
And the Scottish mortgage? I hold it and I will hold it because I think the future usually comes good. But even though you’ve been up 230 percent in the last five years, if you only came three months ago, you’re 23 percent lower.
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Did anyone who put their money into expensive growth stocks last year, when it became clear that inflation was not transient, what would happen to their duration stocks when it became clear that rates would have to rise?
Technology fund ads have told you that there is a risk, but this big one has not been accurately emphasized. You can also ask yourself about some of your other holdings.
And what about all those ESG funds? What exactly is in them? They may be too dependent on fixed assets – is it easier to include low-profit stocks or loss-making renewable stocks in your average ESG portfolio than to high-dividing miners? Owning them for extreme valuation is, of course, different from owning a portfolio of cryptocurrencies, but there are similarities. Think about how far the promise is, and you might think that cryptocurrencies are also a long-lasting asset.
my opinion? Anyone who has laughed a little at naive budding investors and their 10 percent bitcoin losses this year might want to quickly verify that they really know what’s in their own portfolio.
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