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Madness of Crowds

Recently industry fund Rest announced that it is considering investing its members’ money in cryptocurrency.  We think that’s a bad idea. Here are our five reasons why.

  1. Super is for investing, not speculation  

There’s a difference between speculation and investing, best articulated by the famous value investor, the late Benjamin Graham.  He said an investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return.  Everything else is speculation.

If an asset is bought purely in the expectation of being able to sell it later at a higher price, it’s speculation.  And if enough people are doing that then it’s a speculative bubble.

Speculative bubbles never end well.

  1. Even geniuses lose money when they speculate

In 1720, the famous physicist Sir Isaac Newton lost the equivalent of more than $5 million on a speculative whim.  He owned shares in the South Sea Company, the hottest stock in England.  Sensing that the market was overpriced, Newton sold his South Sea shares, pocketing a 100% profit totalling £7,000, or more than $1.5 million today. 

But then he watched the share price continue to rise. It got too much, so just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price.  The share price crashed, and Newton lost £20,000, or more than $5 million today.

If a genius loses money when speculating, what chance do we have?

  1. There is no intrinsic value created

Investible assets should produce something of value. If I invest in a farm, I can expect that farm to produce crops over time. Now, there will be good years and bad years, but if the farm is run well, its yield will increase, and the farm’s price will go up in turn.

Cryptocurrency isn’t a productive asset like a farm.  It doesn’t create anything of value at all.

  1. We don’t fully understand cryptocurrency 

Cryptocurrency is opaque and hard to understand.  Beyond the blockchain technology, it is difficult to really understand the underlying value proposition.  What are the drivers of the share price beyond sentiment? And what is ultimately backing the asset, if anything?

The number one rule of investing is to always understand what you’re investing in.  That’s why we prefer simple businesses where it’s easy to understand the factors of success.

  1. We’re uncertain of its long-term usefulness  

We acknowledge that currency is changing.  Traditional forms of payment are in rapid decline. In Australia, most people aren’t transacting with cash anymore, and more are using digital wallets.  The value of ATM withdrawals over the past six months was around 30 per cent lower than the same period three years ago.  

But that doesn’t mean that cryptocurrencies are necessarily the currency of the future.  We think it’s more likely that currency will continue to be anchored to a state-issued stable value, rather than a cryptocurrency with a volatile price.


We may be wrong.   But even if we are, retirement is no time for speculation.  With When Financial Solutions, you can have confidence that you’re investing in productive assets, creating real products and services.  So, it’s not a matter of ‘if’ you’re investing in quality assets, but ‘when’.


Michael Bowman and James McMaster are co-founders of When Financial Solutions.  This article is general and does not consider your personal circumstances.  If you would like advice specific to you please give us a call.





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