Fomo on Bitcoin can wipe out savings

  • Business
  • Saturday, 21 Oct 2017

Low acceptance: A file picture shows a man walking past a signboard informing customers that Bitcoin can be used for payment at a store in Tokyo. Bitcoin acceptance in the real world is extremely low, especially outside Japan, where it started. — AFP

THE fear-of-missing-out (Fomo) is a financial jargon. It is a psychological fear among investors that they are losing out on an excellent opportunity.

But almost all the time, investors with Fomo syndrome end up getting the raw end of the deal.

Of late, the Fomo syndrome on cryptocurrencies, especially Bitcoin, has and is still prevalent among investors. The rise and rise of the price of Bitcoin is chatter among the working class who has not seen the down side of the stock market.

An executive on the production floor approached me in the lift, seeking advice on investing in a new coin that was going to be launched. Getting queried is not really new as people with some spare money to spend always seek ideas and opinions on investments.

But what was worrying is that this person is hitting 50 years of age and wants to take some money out of his savings with the Employees Provident Fund (EPF) to invest in a new coin.

After five minutes of conversation with the executive, it is clear that the person has been mesmerised by the phenomenal rise of Bitcoin, the most popular among cryptocurrencies.

Bitcoin has gone up five folds this year to above the US$5,700 mark. Among the hundreds of cryptocurrency that are traded, it has the biggest market capitalisation of US$94bil.

A year ago, very few talked about investments in cryptocurrency. Many who wanted to put money in cryptocurrency were advised not to touch it with a 10-foot pole.

Now, after seeing Bitcoin and Ether rise and rise, some are wilting.

There is a view that maybe the cryptocurrency world was misunderstood. Some feel that maybe it is time to start learning more about cryptocurrency and put some money in some of the coins, considering that there is an online market space to buy and sell them.

Some financial advisers, after being pressured and bombarded by questions from their clients, are now saying that maybe some money can be channelled to cryptocurrency to take advantage of the situation.

In Wall Street, hedge funds are being set up just for the sole purpose of investing in cryptocurrency.

There is an element of Fomo among investors on the euphoria surrounding cryptocurrency.

However basic fundamentals of investments will tell that putting money in currency – whether it is cryptocurrencies or hard cash – is a game for sophisticated investors only.

There are no underlying assets backing currencies. It is a high-risk investment and the returns and losses can be great. Bank Negara lost some RM32bil between 1991 and 1993 betting on the British sterling.

That is why the EPF does not dabble in foreign exchange (forex) markets. The chances of the entire capital being wiped out are great. The same applies to cryptocurrency.

There is no underlying asset to the coins. It is traded in a virtual world.

Among the hundreds of coins that have been launched, only Bitcoin has made progress as a currency used for exchange of goods and services.

But even Bitcoin acceptance in the real world is extremely low, especially outside Japan, where it started.

Secondly, when one retires, he or she should ideally look at investments that can bring about steady cashflow to keep up with their expenses.

Normally, people tend to spend more during weekends and holidays. When one goes into retirement, every day is a weekend. They can afford to go for holidays anytime they want to.

They only need to have the financial means and of course be healthy.

Investments in currencies do not give any dividends. The only gains are from the appreciation of the currency and losses are incurred when a wrong bet is placed.

The same applies to cryptocurrency. The investment does not yield dividends. One cannot expect any steady cashflow from the investment.

Investors are only able to realise their investments when price of the coin rises and the investor is able to sell the coin in return for hard cash. There has to be an active exchange for trading of the coin.

And thirdly the exchange where the coins are traded has to be secure. There has to be adequate security so that hackers cannot break into the exchange and siphon out the coins.

One only needs to do a little research at the experience of investors tied to the Mount Gox exchange to understand how fragile the system is.

Increasingly regulators are taking a hard stance on cryptocurrency. Well-known names in the world of finance, such as Jamie Dimon of JP Morgan and BlackRock head Larry Fink have warned that central banks and government would together put a stop to cryptocurrency.

But until that happens, the bubble is building up. The market capitalisation of the top 100 cryptocurrency is already US$170bil (RM719bil).

It is by far the biggest speculative bubble building up. When it burst, don’t be the one that is shedding tears.

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