Before you scoff at crypto losses, what’s in your wallet?

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Cryptocurrencies are popular. If you’re not a grumpy old fuddy duddy, you probably own a lot of them now. Even I, grumpy as anyone, own a few.

Last year, the Financial Conduct Authority estimated the number of people in the UK who own crypto at around 2.3 million, and given the publicity around the various currencies, it stands to reason that this number is already quite high.

Several polls confirm this. Research from Interactive Investor suggests that around 45% of young adults (18-29) have made their very first crypto investment. Data from Boring Money indicates that 11% of young adults (18-44) report owning or having owned crypto assets.

Among those who have only been investing — in anything — for a year or less, that number rises to 16%. It’s good, one might think, for young people to engage with money and markets.

Unfortunately it’s more complicated than that. An “alarming number” of new buyers are “funding this through a cocktail of credit cards, student loans, and other loans,” says Interactive. An FCA survey suggests that 58% of people who trade this type of “high-risk product” take advice from “social networks and their friends”, a strategy which, financially speaking, does not have a successful record. stellar.

The Treasury is worried. He noted this week that while the number of people holding crypto is increasing, “understanding of what crypto is actually declining, suggesting that some users may not fully understand what they are buying. “.

This can be especially the case if they rely on social media ads and the London Underground for their information. Consider one of the most talked about of these last year, from Luno Money.

It said in very big letters: “If you see bitcoin on the subway, it’s time to buy.” It didn’t dampen that call for fear of missing out, even in very small letters, with the information that by doing so you would be buying a possibly volatile and speculative asset that has a high risk of capital loss. – and that could soon be banned by the Russian government.

advised

There is a reason why oversight of cryptocurrency advertising is now likely to be transferred to the FCA. Such advertisements must now (like all other advertisements for financial products) be “fair, clear and not misleading”. I can’t imagine how a crypto advertisement will be all of these things – upfront with no yield, no obvious fundamental value, and no accepted valuation method, for example – and still compelling. Something to look forward to.

But here is a question for you. Would more specific announcements have made a difference? After all, when it comes to not understanding how investments work, it’s not just about crypto.

If only that was the case. Last week, Interactive Investor produced research that I loved. I often say here that the retail investor should outperform the professional for the simple reason that we have something they don’t have: time. We are not accountable to anyone for our quarterly performance, only to ourselves for our long-term performance. Our pensions are counting on us to be more right than wrong.

So I was pleased to see that over the past year, the Private Investor Performance Index showed that ordinary investors outperformed professionals by a few percentage points. Young investors, aged 18 to 24, have also performed remarkably well over the past two years – up 22.8%, compared to 17.2% for a traditional index – the Investment Association’s equity sector. Mixed Investment 40-85%.

And the “secret sauce” that drives returns? A higher allocation to investment trusts.

So here is a question. I love investment trusts. But do the new investors, or for that matter the older investors, who buy them know what they are buying? This is partly a question about the structure of investment trusts. The price of their shares may deviate somewhat from their net asset value. You can buy them at a premium, which none of the investment platforms alert you to on their trading pages.

You might think you bought a fabulous story about longevity, digitization, artificial intelligence, space travel, or fossil fuel-free energy. In fact, you may have purchased an asset that is extremely sensitive to changes in interest rates

But if the sentiment turns against them, you could end up selling for less than their net asset value. Results? You have lost far more money than the change in the share price of the trust’s underlying holdings might suggest you should have.

But it’s also about what’s inside them. The main holding for the 18-24 age group is Scottish Mortgage. SMIT holds many wonderful and exciting stocks with compelling stories to tell that you may want to hold onto for the very long term.

Some are making real money now. Others don’t. But they promise huge growth and huge profits in the (uncertain) future. These future benefits are valued by discounting them to today’s interest rates. The lower the interest rates, the more future earnings are worth. So the more rates fell, the more growth stock prices rose. That’s one of the reasons – along with good stock selection – why SMIT has been so successful for so many people.

You will see the problem. You might think you bought a fabulous story about longevity, digitization, artificial intelligence, space travel, or fossil fuel-free energy.

In fact, you may have purchased an asset that is extremely sensitive to changes in interest rates, or what is known in the industry as a long-lived asset, which will seesaw in price like the rate of discount used to value it.

“If inflation happens – or rather seems like a realistic possibility,” Ruffer’s Jonathan Ruffer said a few years ago, “you won’t see government bonds or tech stocks for dust.”

Well, here we are. European value stocks have outperformed growth stocks by almost 10% in the first 17 days of 2022 and US value stocks are ahead of growth by 6.4% this year, says Duncan Lamont of Schroders. The Goldman Sachs index of unprofitable technology companies was earlier this week down 14% from its peak.

And the Scottish mortgage? I hold it and I will keep it, because I think the future is generally good. But, while you’ve still grown 230% in the last five years, if you came only three months ago, you’ve lost 23%.

Did anyone who invested in expensive growth stocks last year, when it was already clear that inflation was not transitory, knew what would happen to their duration stocks when it would be clear that the rates should increase?

Ads for tech funds told you there was a risk, but it wasn’t exactly highlighted. You might also be wondering about some of your other holdings.

What about all those ESG funds? What’s really in it? Are they perhaps too dependent on long-lived assets as well – it’s easier to fit a low-profit tech stock or loss-making renewable energy stock into your average ESG portfolio than a high-dividend-paying miner ? Owning them at extreme valuations is obviously different from owning a cryptocurrency portfolio, but there are similarities. Think about how far away you are from the promise, and you might also think of crypto as a long-lived asset.

My point? Anyone who’s had a bit of a laugh about naive newbie investors and their 10% bitcoin losses so far this year might want to quickly check that they really know what’s in their own wallet.

Merryn Somerset Webb is editor of MoneyWeek. Opinions expressed are personal; [email protected]; Twitter: @MerrynSW

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