Hello and welcome to It All Adds Up the podcast where we chat about money, how to get it, how to spend it and how to invest it. I'm money editor Dom Powell.
And I am senior economics writer Jess Irvine. And today we're going to talk about the wild world of cryptocurrencies.
Yeah, we figured it was time to take a look at crypto as it's an asset class that people often ask us about and it's inherently quite confusing and also quite controversial.
Yeah, definitely a bit confusing. Definitely confusing for me. It's also an extremely volatile asset class with the price of major cryptocurrency Bitcoin down 50% in the past year. But hopefully by the end of this episode you'll have a better understanding at least of what a crypto currency is and if it's something worth investing in. But first, Dom, I believe you do have some personal experience when it
comes to investing in crypto. We're not calling you a crypto king, but can you, can you explain how you got into it and how did it go for you?
Yeah, so sort of for my sins, I guess I invested in crypto in the early part of 2017. I think I remember reading about it online. I just read something about Etherium, which today is the second biggest cryptocurrency, and I was like, Oh, this is a bit interesting. What's this all about? Went down a bit of a rabbit hole and ended up buying some Etherium at around
the start of 2017. And they like pretty much for the rest of that year I was like full on like crypto trading pretty much every day, constantly looking at my portfolio like it was a full thing.
Were you buying and selling sort of day to day?
Yeah, I like loads of different cryptos. Like I went, I went really deep on it for that year. I don't like to admit this because, you know, it was I was like working full time that year too. So until my old boss. But you know, it was it was pretty full on. And then at the I had this sort of I guess I told myself when I started investing, I was like, okay, if your portfolio ever hits like a certain level sell no matter what, just sell like you will have. That's enough just to sell.
And I hit that level at the end of 2017 and I sold everything and I haven't touched it since.
That's an amazing level of discipline for you to just have that number and you got to walk away from the casino, or if it is a casino.
Pretty much was a casino really to be on, especially at that time. Like there was no sense to any of the valuations that anyone was giving, any of the things that I was investing in. And half the things that I invested in today don't exist. Like that's an indication of while the crypto market was, but it was purely luck because like, like I timed the market almost perfectly. Like literally the day after I saw it, everything started going down and went down for the next year.
And I think we should recognise that's incredibly fortunate. Yes, there is a golden piece of timing.
I've said to people like I will never invest in anything seriously again because I don't think I'm ever going to get as lucky as I did with that. Like it was just complete luck, complete privilege to have the money to invest in the first place, all that sort of stuff. Like I don't proclaim to be an investing genius and you know, you should not look to me for any sort of crypto advice. In fact, these days I don't invest in crypto and I think that it's kind of dumb, but, you know.
Ooh, controversial. Yeah, that's.
That's my that's my sort of done the full 180 on it since since 2017 the market has also changed pretty significantly since 2017 as well so there's a lot of different factors but yeah that's my, that's my crypto journey.
So it's fair to say you don't hold any crypto now, there's no crypto currency in your digital wallet or whatever it is. That's the way you know.
I mean, there's probably like some scraps of things like that. I just haven't got around to selling, but nothing of any value whatsoever. Yeah. Do not you don't invest and have not invested for a number of years.
So I'm similar, I'm the same, I don't hold any crypto. My story is that back at probably the time that you were in your pyjamas wide eyed with coffee, huddling over your laptop or however that the trading works.
That's fair. That's pretty accurate. Yeah.
I remember writing a few columns just sort of basically saying crypto is not a thing and sort of picking holes in a few of the arguments, particularly around scarcity, I think because I think it was even earlier than that when I wrote a column about Bitcoin and I'd never really got the scarcity, I was like, Well, okay, you might run out of things. You can mine on that particular blockchain, but you can just have another cryptocurrency.
You could there's an infinite number of cryptocurrencies you could start, So where's the scarcity in that? But let's, let's just start with, you know, what is crypto? And I keep
saying cryptocurrency, they always currency, what is crypto dumb? And we're going to arrive at a point where we both sort of recognize whether it's something or talk about, whether we think it's something that should be in your investment portfolio, because I do see a lot of younger investors going, Oh, I need to have, you know, a responsible 10% of my portfolio should be in crypto. So I'm well-diversified. I
want to I want to get to that. But let's for anyone who hasn't bought it or sort of is struggling still to deal with what crypto is, what is it done?
Well, I think it's important to to divide crypto into two different sort of camps. You've got things like Bitcoin, which is the one that most people know about, and Bitcoin is effectively just a store of value and a way to transact value like it is very often likened to digital gold because it is, as you mentioned earlier, it has this sort of scarcity built into it. So the original programming of Bitcoin says that only 21 million coins can ever be mined. So therefore once you hit
that number, that's it, there isn't any more. And this mining process, which is sort of how almost all cryptos are made these days, is basically to create cryptocurrency. You have to get a computer to sort of crunch increasingly difficult calculations. And all these computers all around the world are all competing to be the first every 10 minutes
to crunch these calculations. And that sort of forms the basis of crypto in the sense that that's what makes it valuable in a sense, because it requires a great deal of sort of energy and and production to create this crypto. And also, while all those computers are crunching the numbers, they're also validating this network which sort of cross-references and cross-check all the transactions being made every second. You know, it's, it's all sort of this big web
of computers put together. So that's sort of the basis upon which cryptocurrencies are formed. And those sort of features give us something like Bitcoin, you know, theoretically a lot of some attractive attributes in the sense that you can't fake it, like you can't fake a Bitcoin transaction because all these computers are constantly cross-referencing and checking all the transactions at once. And you know, there's a certain limited number of them that are hard to produce, etc., etc.
Hence why you see this digital gold similarity. And then you've got the other cap, which is sort of Etherium is the most sort of prominent one, which are these sort of cryptocurrencies which are programmable. So they have sort of like a software layer to them where you can put all these sort of features and sort of put
all these terms and conditions attached to the transactions. And people say that, you know, all theoretically in the future you could use an a theorem network to completely automate the transaction of a house, right? You could just go bang, it's all written into a contract, you do the transaction and all this sort of conveyancing legal mumbo jumbo is
all sort of baked into this transaction. So that's sort of the other camp of of cryptos, which are less about just the singular transfer of value and more about the actual sort of programming, you know, future of the Internet sort of thing, which which a lot of people claim that it will be. So those are sort of the two different camps. Obviously, that's a lot of information to take in. It's kind of really hard to explain
crypto succinctly. It's such a bonkers and confusing area, but that's about as best as I could do.
But fascinating. No, that's great. I was listening to an interview between Ezra Klein and the founder of Ethereum, which was sort of going into some of those other uses. And I'm wondering with that sort of software that you
can build into a theory, is that open source? So can anyone like you say on a set up a real estate agency and I'm going to use the theory of to sort of do the transactions or is it within the control of a theory as such that they will innovate and come up with the new programmable use?
No, it's completely decentralized, completely open source, like everything's open to everyone. No one controls it, which is another big sort of draw of crypto is that in theory this is all again, in theory, sometimes this doesn't actually work in practice at all. No one can determine how Ethereum network runs or anything like that. It's all very sort of collective and, you know, done together.
Okay. But to participate in whatever innovative new sort of a fancy thing exists, you might need to have some Etherium because that would give it value. Or could you use another digital cryptocurrency.
Well to do anything on sort of like the Ethereum blockchain, the network that it runs on. To do anything on that, you have to pay a fee. And typically those fees are in theory, so you have to have the currency in the first place to to be able to sort of operate on the network.
Interesting, because that's where I'm sort of like, well, maybe it could arise that there are sort of ecosystems around particular cryptocurrencies where you're actually going to need the underlying cryptocurrency to participate and therefore there's value in that.
Yeah, well that's sort of what gives something like a theorem. Its value is the fact that if you want to participate in the network, you actually have to hold the currency itself in order to pay the fees. So that's why the sort of, you know, that sort of token or that coin as they're called, as value, it's a very sort of especially if you come into it from sort of a very sort of traditional finance background, there's a lot of things that are quite confusing and there's
a lot of like stuff that. I think it sort of benefits from the fact that people don't understand it. Yeah. Like it is one of those sort of markets. It's like, you know, the depths of the financial system, right? Like the fact that no one really knows how the hell it works. It sort of works to its advantage in the sense that people can just be like, Oh no,
it's great. It's going to be the future of the Internet, It's fine sort of thing, where in reality it might not be, but it's so complicated that no one really questions it.
Yeah, I'm sort of like, I don't see a world where I have to have Bitcoin to go buy my coffee.
Yeah, well, that's probably never going to happen.
I feel like cash is working pretty well for me for that. But other worlds that don't exist and we can't see the future in which there's fancy online things in which would operate off crypto currencies, in which case you will need them. And if they're limited, then it would make sense to get in early to have some. Yeah. So I'm suddenly turning into a crypto. I'd be like, Oh, I've got to go get some. But but let's just cool down and can you just talk us through what
I mean, what has happened with crypto pricing? How high did it get? It's totally crashed in the last couple of months or years. How volatile is it.
Like extremely volatile. Like over the course of, you know, possibly this conversation, you could see the swing of like a of a major crypto like Bitcoin over Etherium, you know, go up or down by $100. Like that's not uncommon. Like it's a massively volatile market. You know, back when I was investing in like 2017, it was more volatile. Like it was really, really like, you know, all over
the shop all the time. And I think we it hit its peak last year also partially due to COVID and a lot of the stimulus that was around a lot of people getting into investing and crypto for the first time, I think Bitcoin got pretty close to if not, it hit 100,000 AUD like it was. Like, really, really high. And then since then, it's fallen by like 50% or more like it is completely plunged. And that was in about November last year. So certain markets have taken a real significant downturn.
Which has really pulled the rug out of one of the arguments people sort of thought at a time back in the day when sort of interest rates were really low and sort of there was sort of this theory that central banks can't control the the value of money and we need to have this independent thing. It'll be a hedge. And, you know, in uncertainty, when all global currencies fall apart, we'll have this sort of more secure thing and it will be a hedge against times of uncertainty.
And so, you know, one of the things are going down, it would go up or like has it that it's some sort of defensive element of your portfolio that might outweigh other turbulences turned out to be completely untrue.
Yeah, well, it just turned out to be complete crap because what happened is a little like the, you know, the traditional finance people got into crypto as well, and then the crypto decided following exactly what traditional finance did and people just sort of traded like a tech stock. Now like it pretty much car. Like if you look at the price of bitcoin, it kind of tracks what the Nasdaq does.
I mean, the thing that gives crypto such bad name is all the sort of spruiking and we've seen recently, like Kim Kardashian is being fined for being involved in sort of spruiking. And I think Matt Damon has an ad for a cryptocurrency and some of the advertising is around like, you know, yeah, I know you don't understand it, but just but anyway.
Yeah well like don't don't miss out don't be behind sort of thing.
Yeah. The sort of FOMO aspect of it but okay so volatility aside and you know spruikers beside what are some of the reasons why you might want crypto in your portfolio.
Well I think like the number one reason and like I think a lot of people sort of recognise this with crypto is the fact that it's can have a massive upside, right? Like you know, look at what will happen to me in 2017. Right. That's insane. Typically you're never going to see like a massive increase in value over the course of a year, as you know, we
did back then. And it's not uncommon that, you know, for certain cryptos, you could see them rise, you know, 100 or 200% over the course of a year like that typically doesn't happen for equities. Right. Like, that's pretty rare. So obviously, that's the number one upside and why people have a lot of it or want to think that they should have some in their portfolio is because of the of the potential upside. And then I suppose on
top of that, you got diversification like it is. You know, it is distinctly different to equities and commodities and things like that, like it is a truly sort of unique asset class in the way that it functions and all that sort of stuff. And also, I guess as we sort of mentioned earlier, like people did view it as a bit of a hedge to, you know, traditional markets, but that's not really true anymore. So that's sort of that can be a kind of be a reason why
you might put it in your portfolio. And I suppose maybe the last reason would just be that there are some people who out there who think it is going to be the next version of the Internet. I don't personally agree. I don't think it will be the next version of the Internet, but there is sort of like a decent sized camp that think that things like Etherium and all that sort of stuff is going to be sort of the basis upon what the next iteration of,
you know, the World Wide Web will be. It's this sort of term web3, which gets bandied around a lot without much meaning. And, you know, I think that that's sort of going to be the next frontier. So, I mean, if you if you sort of buy into that and you think that these people might have a bit of a point, then, you know, putting some in your portfolio obviously kind of makes sense because you could be at the forefront of a next of the next big thing.
But that's obviously up to you to decide, as with every investment.
Of course, and it seems like on the risk spectrum, like of investments, it's way out there on the frontier of something that is high risk. Yes. Compared to shares compared to property, you know, work out. You know, there are other places to put your money, essentially. And if you if you do sort of park some money there, I think it probably won't to be money that you didn't want back in in a hurry.
Yes. And definitely not one for sort of anyone who's sort of environmentally conscious in terms of their investments, because crypto as on the whole is really bad for the environment like the Bitcoin network does, I think has a carbon footprint, annual carbon footprint equal to that of Greece. Well, as in the country Greece. So that just gives you an idea it is not good for the environment and you'd.
Have to think that investments that are not good for the environment are sort of not going to produce value over time. While like stocks, the companies that are heavily have those imposing those externalities on society are not going to do so well. Well, that's my opinion anyway. Yeah. So. Alright, well let's wrap it up. Do we need to buy crypto in our portfolio? What do you reckon?
Well, I don't know, Jess. I think you're the one to ask the other sort of the passive that was sort of, I mean I worry about it after this chat. How do you, how do you feel about putting Bitcoin into your book?
Look, I struggle I still struggle to see as an asset class what it is because I know. Property, you get rental returns and capital appreciation. You know, if you don't get the good upside to the price, you're at least getting some rent shares the same. You're owning an actual company and they're going to distribute some of the profits to you. You know, bonds, they're going the government's going to pay you a fixed rate on that. What's
the income generating potential of of crypto? I don't think there is or not one that I can imagine just yet. You're sort of it's it's sort of like a commodity, as you say, or like gold and you really taking a bet on, you know, how the asset valuation will go. I don't quite understand it, but I'm also I'm just like, perhaps we can conclude that I am crypto curious because, you know, there are relatively intelligent people who seem to
be very deep in this ecosphere. And I'm aware, you know, sometimes you can't see what the future is, but I don't know in a world if they're inventing Web3, I still don't know what that is, but it sounds pretty good. Maybe I'll have a happy life anyway. I'll just enjoy being a consumer on whatever the platform is. But am I going to need some crypto to participate? I don't know. I'll probably be dead by then, so I'm not rushing
out to to get crypto. And I I'm not sort of saying that anyone should do what I do or whatever and get your own advice, but I sort of don't see it as something that's going to be necessary for my life.
Yes. I mean, I, I mean, as I sort of said, I think I've done my dash when it comes to crypto. I'm pretty happy with what happened. And these days, I think like firstly, do research and do more research than you would for any other investment. Like if you're going to look at crypto, you need to sit down and you need to really read everything, get a really balanced perspective because there's just so much sort of nonsense out there that people push. So do a lot of research.
And then if you really think you want to invest like my sort of, you know, again, not providing any financial advice, but I think just common sense would dictate that the things that you would want to look at would be things like Bitcoin and theory and like the big ones. They're sort of been around for the longest. They relatively stable. You know, those would be the sort of the obvious choices if I were to make a choice.
Excellent. Well, we'll expect you to be well dressed and out of the house now that you're no longer a crypto investor, which is not to denigrate anyone who is making some. Maybe I might be stereotyping there. Alright.
And now we've got our listener question of the week, as we always do, and thank you for everyone who's been sending them in. We've got a inbox that is nice and full of questions but always keen to hear more, so please do keep on sending them. And this one is from Kirsten, who says that she has a large mortgage and she has been investing extra cash into an ETF and not paying extra off her mortgage. She also
says that she has a three month emergency fund. However, she's worried that she'll come off her 1.84% fixed interest rate was the end of next year and her repayments are going to go through the roof. So she's asking should she pause her investing now and shovel all of that extra cash into her mortgage between now and the fixed rate comes off because she's trying to not be too terrified about this fixed rate cliff, which is approaching
for her and many other borrowers. And Jess, what's your thoughts on this?
Yeah, Kirsten, you're speaking to me because this is pretty much exactly the situation that I'm in. Even that rate is my my mortgage rate, and it rolls off in the middle of next year. And I'm currently, you know, because I'm a bit of a budget her I do know I'm generating cash surpluses every month and I'm like well what do I do with that given that I know I'm going to hit this cliff where I'll be refinancing to sort of maybe a 4.55% interest rate that's
going to eat into my buffer a lot. I am confident that I can still when that happens, I'll be able to pay that. So with the surpluses that I'm generating now, I've got to decide do a will, do I start trying to throw it at the mortgage or do I keep investing? I you know, the main thing is, is when you hit that cliff, are you going to have the cash flow to be able to pay your mortgage? And if you're not, you might want to be squirreling away some cash because you're going to need into your
cash savings. The focus should really be on making sure stress testing yourself. Are you going to have the cash flow to meet your mortgage repayments when it goes up? And if you are and I'm fairly confident that I am, I am still continuing to invest because, you know, you're making that assessment of do I think the long term returns of of investing are going to be better than
paying down my mortgage? You know, and I can't see the future, but I do like to still be, you know, investing some money and getting some sort of ticket on whatever returns the share market will do. Whilst, you know, the cost of my mortgage is really low. So I think it's going to to change when I do because I'm just not going to have a cash surplus anymore. Basically with interest rates going up, my repayments are already going to be about $1,000 more per month. All right.
Pretty much my monthly cash surplus that I've. In investing, so I won't have a choice. My only thing for Kirsten is if she. If she's. She's trying not to be terrified. But if she is feeling a little bit uncomfortable, maybe that three month emergency fund might need to be a little bit bigger. I've got a six month basic living expense emergency cash buffer, so I feel pretty confident
in that. And so maybe you might just feel a little bit more comfortable sleep at night if you had a little bit more cash, you know, sitting in the in the offset rather than investing more. But then, you know, shares are down. It's you know, it's hard to not want to be trying to get some buying opportunities there.
So it's hard. But my main thing is get a really laser like focus on your expenses and convince yourself that you will be able to afford your stress, test your finances to make sure you can afford the repayments when when they go up. And then, you know, either way,
it sort of depends on how how you're feeling. If you're getting pretty stressed about it, maybe not locking all your money up in the share market or again, pocket analyst doors, why not do a bit of a bit more squirreling, a bit more investing?
I think it's it's good that that person's got that three month emergency fund in the first place. Right. Like that's a good starting point, especially when you worried about interest rates going up because like a lot of people be worried about interest rates going up and they wouldn't have that sort of emergency fund. So I think you're in a good spot. Start with and then it's just about how you manage it from there on out.
Yeah.
And to bring us home, it's just this budget tip of the week.
So my tip this week is just to make people aware of something called a no interest loan scheme. So this is for people who are earning under 70,000 or who have sort of access to a health care or pension card. So it's at that lower end. If you hit a massive expense like the washing machine breaks down, the car breaks down, there's actually an availability to you to get a no interest loan of up to $5,000 for cars, up to $2,000 for appliances or medical bills.
It's run by NAB Bank in conjunction with the Good Shepherd Organisation and I'll give you the phone number. But instead of going to a payday lender, putting it on the credit card with 20% interest or whatever it is, you can actually borrow the $2,000 and pay it back in small chunks over time with absolutely no interest applied. So if you're really in an emergency type situation, you don't have that emergency savings buffer. This is one to to look out for and I'll just give the number.
You can call them the Good Shepherds No interest loan team on 13 6457 or just Google no interest loans and Good Shepherd and find out more information about that.
Thanks everyone for listening again this week. I hope we managed to demystify the world of crypto a little bit for you. If you've left it just as confused as you are. I'm sorry we did our best.
And I do tend to think that the best piece of financial wisdom is not to invest in things you don't understand properly. Absolutely more research to do. If we've tempted you in some way.
We'll be back again next week, as usual. And thanks for listening.
Thanks for listening. This episode of It All Adds Up was produced by Chee Wong. The information discussed is general in nature and does not take into account your personal financial situation, goals or objectives. You should always do your own research or get professional advice before making any major financial decisions. If you like today's episode, hit follow in your podcast app. Leave a review and recommend it to
all your friends. You can submit your listener questions in text or audio format at italladdsup@nine.com.au .