How much of your portfolio should be made up of cryptocurrency – analyst
The value of cryptocurrency as a concept and as an investment vehicle continues to stir debate in South Africa’s financial and investor circles.
However, according to Gavin Smith, deVere Acuma head of Africa, if one is to invest in digital currencies, 5% or less of an investor’s total portfolio should be allocated to them.
Citing independent research, he said that cryptocurrencies should not be dismissed as an investment opportunity.
Smith said that the diversity of products now available means that Bitcoin’s dominance is being challenged by the likes of Ethereum and Ripple, which offer a different proposition for investors.
“Bitcoin, unlike these two, sees itself primarily as an alternative to fiat currency,” he said.
“Ethereum should do well in 2018 as (its) blockchain technology can be applied to other industries and is not only limited to cryptocurrencies,” he added.
“What sets Ripple apart is that it does not have a blockchain but instead uses a ‘global consensus ledger’, which is increasingly used by major global banks and finance houses.”
Regulation
A recent Cambridge University study found that as of April 2017, the combined market value of all cryptocurrencies was $27 billion, which represents ‘a level of value creation on the order of Silicon Valley success stories like AirBnB’.
It found that the current number of unique active users of cryptocurrency wallets is estimated to be between 2.9 million and 5.8 million, and between 5.8 million and 11.5 million wallets are estimated to be currently ‘active’.
Smith said that independent research also gives credence to the conviction of the crypto-converts that it will almost certainly play a bigger role in financial systems the world over as well as how societies view money in future.
“With this in mind, it is important that investors consider the potential opportunities and the benefit to their own portfolios,” he said.
Recognising the impact of digital currency on individuals and markets, financial regulators and governments are starting to respond, said Smith.
“To clarify the tax implications for a crypto-investor, the South African Revenue Service said in April that it would “continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare gains or losses as part of their taxable income.
“The taxman further pointed out that the onus was on the “taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued.”
Smith said that with regulation becoming more likely, the sector is likely to mature relatively quickly, offering further levels of protection, and will be viewed by even more investors as a valuable investment proposition.
“Research proves what sentiment cannot: data doesn’t lie. Cryptocurrency will continue to gain traction and should not be ignored when deciding on diversifying one’s investment portfolio,” Smith said.
Bitcoin as Gold
A recent article published by Bloomberg noted that in the seven months since Bitcoin’s price peaked, it has fallen by about two-thirds.
“But it’s still almost three times more valuable than it was a year ago,” wrote Noah Smith.
He projected three basic scenarios for what is still the most famous cryptocurrency, going forward:
1. Bitcoin Triumph: Bitcoin replaces the dollar (and probably other fiat currencies as well) as the economy’s main unit of exchange. People buy pizzas, finance their mortgages and pay their rent in Bitcoin.
2. Bitcoin as Gold: Fiat currency remains the main unit of exchange everywhere except in a few extremely dysfunctional economies like Venezuela’s. But Bitcoin’s market capitalization remains substantial, and it rises in value over time, occasionally experiencing large bubbles and crashes.
3. Bitcoin Bust: Bitcoin is abandoned, crashing relative to the dollar and never being useful as a payment method for daily necessities.
Read: How many South Africans still think Bitcoin is a bad idea – and those that wish they
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