Welcome to the Manager Panel! Each month to supplement the lead article in InvestNow’s Magazine, InvestNow will ask a few of our Fund Managers some questions around a topic. Read below their thoughts on cryptocurrencies, in regards to the September lead article  — Crypto-facto: Investing in the digital asset age.

Q1: What’s one good thing that you think cryptocurrencies have brought to the investing world?

One good thing is that it has raised the awareness of investing in general. People are becoming more interested in ways to grow their money to help them reach goals. The trend of cryptocurrency has raised awareness of other investment options too, like shares, KiwiSaver and managed funds. However, it’s important to always ask yourself: Why am I doing this, and do I really know what I am investing in? Buying something just because you think it will go up is not a good strategy, and it may not pay off. Without a strategy if something goes wrong, you’re paralysed. You can do better. Do your research before investing in anything. Learn about your tolerance for risk, and your investment timeframe. Diversifying, and having a strategy and a plan are great ideas too.

Q2: Do you think in the future, cryptocurrencies should become an official currency/legal tender in countries such as NZ? Why/why not?

No. Cryptocurrency is not cash. While it’s a digital currency, it does not hold its value for long. It could be up today, then experience a huge drop tomorrow.

Imagine if you were paid your wages in cryptocurrency. Because of the fluctuation in price, your wages could vary hugely.

I don’t think central banks will allow Bitcoin or other independent cryptos to become anything more than another commodity that is priced in USD. Central banks need to control the financial system (otherwise chaos will ensue) and they simply cannot allow another asset to take over as the main medium of exchange. They would then be unable to regulate the money supply, availability of credit, or interest rates.

Q3: Do you personally invest in cryptocurrencies? Why/why not?

No. I invest for the long term. A cryptocurrency is referred to as a speculative investment, meaning it involves a high degree of risk and the price fluctuates. Speculative investment is usually done with a short-term focus, compared to a long-term investment where the value of the investment is expected to rise over the long term.

I don’t think there are many people who would want their retirement savings subject to such extreme highs and lows, with the added risk they could lose the lot.

The Financial Markets Authority has good guidance on cryptocurrencies. If you are desperate to try it, I suggest doing your research first and only investing a small amount you are prepared to lose. (link to FMA: https://www.fma.govt.nz/investors/ways-to-invest/cryptocurrencies/)

Disclaimer: Mike Taylor is the CEO and Founder of Pie Funds Management Limited. You can view our disclosure documents on the Pie Funds website. For personalised financial advice, please speak to a financial adviser.

Q1: What’s one good thing that you think cryptocurrencies have brought to the investing world?

They have certainly created more interest in capital markets amongst a much larger swathe of global investors and speculators but I definitely do not think they are a sound investment at this point in time. In fact, I would not be surprised to see speculators in crypto assets lose a significant amount of money as governments and central banks step in to regulate these markets.

Where I do believe cryptocurrencies are appealing is in their technology which is clearly a disruptive innovation, that provides for greater inclusion and accessibility, lower transaction costs and faster speeds for a large part of the global population (particularly the unbanked) and the fact that as a new frontier it will spark further innovation amongst users and developers.

In particular, the larger technology behind crypto — blockchain — has potentially revolutionary impacts for global trade. A study by the WTO found that shipping avocados from Kenya to the Netherlands might involve more than 30 agents, 100 people and 200 interactions and take 34 days; 10 of which are spent sitting at port, immobile, while documents are verified. Blockchain technology makes this transaction faster by orders of magnitude — the usual paperwork is taken care of in seconds, not days.

However, like all new and disruptive technologies a lack of guardrails (regulation) creates challenges for many capital market participants.  For example, we now have crypto platforms seeking to pay interest on bitcoin balances much like a traditional bank does with customer deposits except the crypto platforms are not regulated like traditional banks in terms of capital ratios and protections that are offered to most depositors.  In recent weeks we have seen increased commentary around the Securities & Exchange Commission (SEC) in the US beginning to focus on crypto currency exchanges and trading venues, I see this as a positive development in the path to digital assets gaining more credibility as an investment proposition versus a speculation for many of these “assets”  today.

Q2: Do you think in the future, cryptocurrencies should become an official currency/legal tender in countries such as NZ?

I believe central banks around the world (including the RBNZ) will create digital currencies in the future, perhaps augmenting existing physical currencies but I do not see current cryptocurrencies being adopted by any legitimate central bank.

On 22 September 2021, it was reported in the Wall Street Journal that SEC Chairman Gary Gensler likened the thousands of cryptocurrencies in existence to the so-called wildcat banking era that took hold in the US from 1837 to 1863 in the absence of federal bank regulation. Before President Abraham Lincoln created the Office of the Comptroller of the Currency, banks issued their own currencies which they sometimes refused to redeem for their purported value in gold or silver.

One of the more interesting developments recently is SEB’s (Skandinaviska Enskilda Banken) work on a cryptocurrency, called Contour, that may be a sign of where currencies are headed. Contour acts as a letter of credit between multiple banks and parties, decentralising a key process in international trade.

However, the history of currency is not an easy or predictable one. Banknotes are a relatively recent 18th century device for transferring and storing credit. Letters of credit and bills of exchange, were popularised in the 13th Century by the Lombards of Northern Italy. In a sense, the new technology of Contour is very similar to what the Lombards were doing 800 years ago! (There really is not anything new, only new ways of doing the same thing.)

Q3: Do you personally invest in cryptocurrencies? Why/why not

No –I do not believe cryptocurrencies are an investment they are a speculation. As I have aged and gained a little wisdom in financial markets I avoid speculating. Christine Lagarde – European Central Bank (ECB) President puts it well in this video in my opinion: https://www.bloomberg.com/news/videos/2021-09-15/-cryptos-are-not-currencies-full-stop-ecb-s-lagarde-says-video?sref=ASvYlIHE

Q1: What’s one good thing that you think cryptocurrencies have brought to the investing world?

Cryptocurrencies offer investors a new asset class to consider in their portfolios.  It won’t be suited to every investor’s portfolio, but there will be a set of investors who’ll appreciate having the choice to invest in cryptocurrencies.

Q2: Do you think in the future, cryptocurrencies should become an official currency/legal tender in countries such as NZ? Why/why not?

No I don’t expect that cryptocurrencies such as Bitcoin and Ethereum will become official currencies.  Governments and central banks will always want to regulate the supply of money and will, sensibly, want a currency whose value moves to reflect the relative strength of their national economy rather than being driven by factors outside of their influence.  Greece’s financial crisis illustrates the risk of adopting an official currency that doesn’t move in sync with your own economy, yet the Euro was more aligned with Greece’s economy than Bitcoin would be with New Zealand’s.

Neither do I expect that cryptocurrencies such as Bitcoin and Ethereum will become legal tender (as in companies and individuals would have to accept payments made in them).  That would impose significant compliance costs on businesses and banks, including both one-off costs such as systems and also ongoing costs such as maintaining pricings in multiple currencies.

That said, I do expect that banks and payment processors such as Visa will introduce products that simplify payments via cryptocurrencies – so while they may not have formal national standing they will still be useable for some financial transactions.

And I’d caution about being careful what you wish for.  If cryptocurrencies were to become official currencies or legal tender then that would inevitably lead to a lot more regulation and oversight.  At the moment they sit in a lightly- or un-regulated zone, and their promoters will need to decide if that is a feature or a bug.

Q3: Do you personally invest in cryptocurrencies? Why/why not?

No I don’t personally invest in cryptocurrencies.  Firstly, our investors will expect me to prioritise investing alongside them in our fund.  Secondly, I’ll confess to sticking to the asset classes I know and understand.  Thirdly, I struggle with the E, S and G aspects of cryptocurrencies.