RUTH SUNDERLAND: I avoid crypto

Just because the price of bitcoin has soared this year and you can still make a profit doesn’t mean you should join the crowd.

Thanks to the support of newly elected President Trump, crypto has been brought in from the cold and is in danger of gaining a layer of respect.

Hence the increase – but nothing fundamental has changed. Describing crypto as a currency is a misnomer because it has none of the essential characteristics of money: it is not a unit of account, it is not a reliable store of value, and it is not a widely accepted medium of exchange.

The current hype makes it seem like everyone is a winner. Charities like Gamblers Anonymous know the truth can be very different. They are dealing with more and more crypto victims: people who have lost their savings and destroyed relationships in the pursuit of bitcoin wealth.

Perhaps it would be better called ‘betcoin’. The fact that crypto has lured problem gamblers is itself revealing. This speaks to the buzz of gambling, rather than the calm decision-making process with which investors should ideally approach their portfolio.

Crypto has become too big to ignore. According to watchdog the Financial Conduct Authority, around seven million people in Britain, around 12 percent of the adult population, own crypto assets.

That’s sobering. Many of these people may not be aware that crypto is unregulated and if they fall victim to fraud they will not be covered by any UK compensation scheme.

It’s also sobering to hear that the most bought stock on one of Britain’s biggest investment platforms last month was MicroStrategy. This US-listed company is Bitcoin on steroids – it buys vast amounts of borrowed money, which hedge funds and others lend at zero interest in exchange for IOUs that are converted into MicroStrategy stock.

These “investors” are betting that the value of bitcoin will rise, aided by MicroStrategy’s buying frenzy, and that this will push up the value of its shares. The company’s current market capitalization is more than the supposed value of the bitcoin it holds.

The pitfall of leverage – the use of borrowed money to increase exposure to an asset, real or imagined – is that it magnifies profits, but it also magnifies losses.

Students of stock market history will know that when London taxi drivers are suddenly crypto experts and the older gentleman across the street starts asking if he should buy bitcoin for his grandson, it’s time to be wary. The crypto boom is a sign of disillusionment with governments, conventional investments and central banks. That explains the increase, but does not justify it.

Wall Street legend Jamie Dimon, who guided JP Morgan through the financial crisis and is perhaps the world’s most prominent crypto skeptic, has argued that there are three reasons why governments will eventually intervene.

Firstly because of the use of crypto to finance terrorism, secondly because sooner or later old ladies will be financially ruined and thirdly because governments like to control their currencies and crypto could undermine that.

Trump claimed in the summer that Dimon had changed his tune on crypto and there were reports that the newly elected president would consider him for treasury secretary. Ultimately, that role went to Scott Bessent, a pro-crypto hedge fund manager.

Dimon was right all along. The Bitcoin bubble will burst and the longer it continues to inflate, the more painful it will be.