RUTH SUNDERLAND: I’m staying away from cryptocurrencies

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

Cryptocurrencies, thanks to the endorsement of President-elect Trump, have come out of the cold and are in danger of gaining a veneer of respectability.

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

The current hype makes it seem like everyone wins. Charities like Gamblers Anonymous know the truth can be very different. They are dealing with a growing number of cryptocurrency victims: people who lost their life savings and ruined their relationships by chasing bitcoin riches.

Maybe it would be better to call it ‘betcoin’. The fact that cryptocurrencies have attracted problem gamblers is revealing in itself. This speaks to the enthusiasm for betting, not the calm decision-making process with which investors should ideally approach their portfolio.

Cryptocurrencies have become too big to ignore. According to the Financial Conduct Authority, around seven million people in the UK, around 12 per cent of the adult population, own crypto assets.

That’s sobering. Many of those people may not be aware that cryptocurrencies are unregulated and, if they are victims of fraud, are not covered by any UK compensation scheme.

It’s also sobering to know that the most bought stock on one of the UK’s largest investment platforms last month was MicroStrategy. This US-listed company is bitcoin on steroids: it buys large amounts of borrowed money, which hedge funds and others lend out interest-free in exchange for promissory notes that are converted into MicroStrategy shares.

These ‘investors’ are betting that the value of bitcoin will rise, helped by massive MicroStrategy purchases, and that this will drive up the value of the stock. The company’s current market capitalization is greater than the assumed value of the bitcoin it owns.

The problem with leverage (using borrowed money to increase exposure to an asset, real or imagined) is that it amplifies profits, but it also magnifies losses.

Students of stock market history will know that when London taxi drivers suddenly become crypto experts and the old man across the street starts asking if he should buy bitcoins for his baby grandson, it’s time to have careful. The rise of cryptocurrencies is an index of disillusionment with governments, conventional investments and central banks. That explains the increase, but does not justify it.

Wall Street legend Jamie Dimon, who led JP Morgan through the financial crisis and may be the world’s most prominent crypto skeptic, has argued that there are three reasons why governments will ultimately clamp down.

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

Trump claimed in the summer that Dimon had changed his mind about cryptocurrencies and there were reports that the president-elect was considering him for Treasury Secretary. Ultimately, that role fell 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.