Investing in bitcoin and cryptocurrencies (or cryptos) is not only unsuitable for anyone with a low tolerance for risk but they should also be off-limits for socially-responsible investors.
The Bank of International Settlements (BIS) declared them to be useless and an ecological disaster, according to The Telegraph.
The judgement from BIS could prove to be the final nail in the coffin for cryptos even though the price of bitcoin jumped nearly three-fold in the current financial year. That’s well in excess of the 9% gain by the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.
The Swiss-based BIS is the bank of central bankers and is regarded as the world’s foremost authority on cryptos.
Bitcoin investors may not feel like celebrating FY18 gains as the value of the world’s most recognised crypto has suffered recent big falls which wiped out more than 50% of its value since January.
But FY19 could bring more pain given the damning assessment by BIS which said that bitcoin and its crypto-posse do not work as a means of exchange as they are too slow, suffer from high transaction costs and are not scalable.
The more people using a crypto, the slower the whole system becomes. This is unlike fiat currencies or other established forms of exchange, where the more people who use that particular method for payment, the more efficient that becomes.
The report noted that mining bitcoin alone consumes as much electricity as Switzerland and that makes bitcoin an “environmental disaster”.
The supranational institution also pointed out that digital currencies can be rendered worthless through fraud or manipulation as they are not backed by assets, revenue or any established government. BIS believes they are nothing more than a Ponzi scheme.
This lack of trust is a key reason why current cryptos will fail but this issue of trust isn’t confined to the digital world. BIS highlighted the inherent problem with currencies, whether in the digital or physical realm. If they can be scalable to quickly accommodate commerce and trade, they can be easily debased.
History is littered with failed currencies and sustained periods of stable money is rare.
The harsh judgement from BIS comes despite a number of central banks experimenting with the blockchain technology to facilitate payments.
Blockchain is the distributed ledger system that backs bitcoin transactions and central bankers from Canada, Singapore and Japan have been looking closely at the technology. But according to The Telegraph, these central banks haven’t found a compelling reason to issue their own state-controlled cryptos.
While it’s anyone’s guess when the day of crypto-reckoning will come (not even BIS will dare venture a guess), the mounting body of evidence suggests that you shouldn’t bank on bitcoin racing back to its peak of around US$20,000.
What’s worse, no one can tell you where the bottom is either (except zero) because cryptos lack any intrinsic value in themselves.
So while bitcoin may have generated much stronger returns than equities in FY18, investors should stick with stocks. At least we understand why and how value can be created by backing the right company.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.