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Abu Dhabi, UAESunday 23 September 2018

Avoid the cryptocurrency 'rat poison' and exit while you can 

With heavyweights such as Warren Buffett dismissing Bitcoin, Peter Cooper wonders why investors are still getting on board

Bitcoin's fall from $19,000 late last December to $6,000 has not deterred investors. Kin Cheung / AP
Bitcoin's fall from $19,000 late last December to $6,000 has not deterred investors. Kin Cheung / AP

These are the best of times and also the worst of times for investors.

Stock markets remain at dangerously overvalued levels, so count your profits but don’t forget to consider the downside - typically 20 to 30 per cent in a correction and 50 per cent in a crash.

Likewise keep an eye on rising bond yields. That means bond prices are now dropping, and on a falling trend for the first time in over 30 years.

If this is the reversal of the long bull market trend that it increasingly looks like, then the benchmark-of-all-assets is faltering and that could bring down the whole house of cards.

Next, consider what the weakest links in the global economy are. Say economies where debt is above 100 per cent of GDP, like Turkey and China. Is that where it will start?

Or are higher oil prices going to blow up the global economy as in 2008?

You might conclude that cashing out now is the best option, or at least a significant part of your portfolio.

In the UAE private equity scene it was curious to spot the founder of The Entertainer discount voucher programme, that we all use to make restaurant prices here a little more affordable, recently announcing the sale of most of her stake in the company.

The brightest business minds often get their timing right and ‘diversify’ while they still can: it’s an instinct like getting out of the way of a steamroller.

Unfortunately in personal finance there is a tendency to focus on saving dirhams and ignore the bigger picture emerging around us.

Indeed, the most popular personal finance articles at the moment are all to do with how to cut down on smaller items of expenditure to stretch the family budget.

Put a brick or two in your toilet cistern, that kind of thing, or more seriously decide to send a child back to India for their education.

This is sensible but I throw up my hands in despair when I hear that the same families have decided to ‘invest’ heavily in cryptocurrencies.

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Read more from Peter Cooper:

What makes Dubai's real estate market of today so different from 2008

How to bulletproof your portfolio against the new bear market

Using the catch-up theory for investment in global property

How to maximise your gains in a gold rally

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Warren Buffett and Bill Gates are the latest sages to warn on this option. Mr Buffett talked about Bitcoin being like rat poison and Mr Gates said he would short it if he could.

If you think you know better than two of the richest men in the world then good luck to you.

Neither of these business superheroes has any vested interest in knocking cryptocurrencies. They just know how to spot a Ponzi scheme when it is dressed up as a technological revolution - a Bernie Madoff upgrade.

Then consider the promoters, sorry investors, who speak up in favour of cryptos. How many are not themselves deeply involved in this investment scam?

How do you even know that they have made the fortunes they claim? In truth, who are these people? Certainly I cannot name a single credible economist or financial journalist who backs cryptos.

Sure blockchain is a new technology. The IT sector is still alive and kicking and turning out software and necessary updates by the bucketload. But blockchain is simply another. It is not a revolution like the internet.

Show me the viable blockchain application that is not another cryptocurrency, of which there are now more than 1,600. How many more bubbles can these conmen and women blow up before it all comes crashing down?

That’s why the world’s greatest ever investor calls it ‘rat poison’. Actually I would have thought the crash in Bitcoin from $19,000 late last December to $6,000 might have taught people a lesson.

But hope springs eternal. The more down-to-earth investor might ask, just where are you going to find enough buyers to push the price up in a vertical line again after so many have just lost huge amounts of money?

Well these are difficult days for investment advisers with such desert mirages to deal with and not a lot to offer as an alternative, except to remind individuals that they do have the chance to cash out now rather than sit and wait for a large black hole to appear in their portfolios.

So what should you do if you have just taken advantage of the high financial markets and cashed out?

Well, first don’t try to be too clever and go short, particularly by buying those nasty Exchange Traded Funds that claim to do it for you but in practice take your money away unless you have pinpoint timing or a lucky dice.

Shorts can take all your money and cannot deliver more than a 100 per cent gain unless geared up with options. It’s a specialist game and even those players can lose their shirts on their shorts.

Where the cash holder might like to spread their risk is by holding a series of different currencies, including the oldest of all, gold and silver.

It is notoriously difficult to predict where currencies are going in terms of relative value. Hence an allocation between the dollar, euro, yen and Swiss franc spreads this risk.

Dirham savers have witnessed the impact of a weaker dollar over the past couple of years and its recent smaller rally. You would still have been 10 per cent better off going into euros two years ago as I suggested in this column, and the dollar could well resume its fall.

My personal theory on gold and silver is that prices would already be much higher if it had not been for competition from cryptocurrencies for speculative money, and the higher gains allegedly made by some in this highly volatile and unpredictable bubble.

The smart money would therefore move into gold and silver, and buy shares in the top precious metal producers as the next ‘Fang' (Facebook, Apple, Netflix and Google) stocks.

Then wait for the cryptocurrencies to go down the pan as Mr Buffet, Mr Gates and a legion of other serious investors predict, as that should move the gold price sharply upwards.

Peter Cooper has been writing about finance in the Gulf for more than 20 years

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