Detailed analysis of various business sectors in Uganda

Cryptocurrency investing – welcome to the jungle (goldilocks)

Outside Looking In

D E Wasake, FCCA

Feb 2021

About the writer

For over 15 years I have worked with several clients in Uganda, The Bahamas and the United Kingdom in providing audit, tax, accounting and advisory services. My experience with various clients in the different sectors, including a $1 billion crypto currency client enables me to have a good understanding of this business. To see the full depth of my experience, please see my profile.

Article summary

The article presents the case for how an investor with $10,000 will generate an average return of 149% by investing in a portfolio of the most commonly traded cryptocurrency assets. It also discusses the most common risks.

Background

About 6 years ago in 2015, a “geeky” friend of mine, told me that the future of the world of financial technology (“FINTECH”), he told me it was much cheaper to send money using something called “Bitcoin”. He then introduced me to the “bitcoin wallet” and he even sent me $1 to test. About 4 years later in 2018 when bitcoin news was going crazy, I reminded him about it when I checked my wallet, my $1 had turned into about $40! I remained skeptical – based on all the articles I was reading.  

I couldn’t in the world understand about this mystery “Satoshi” the creator of Bitcoin let alone all the words thrown about like “hash power” and “block chain”.  It did look like a Ponzi scheme and given what had happened with forex trading in Uganda, it seemed one to stay away from, particularly given that the prices were wildly fluctuating and some government regulators look at this asset with suspicion (for example the UK, and likely the Bank of Uganda/Ministry of finance).  

Three things however changed and made me look at this asset class again:

  1. I have a UK based client who has invested in crypto assets and one year ago, they had about £400m in assets. This year they have, wait for it, £1 billion.  They use an algorithm (“trading bot”) to buy and sell automatically from one exchange to the other, making small gains and profits along the way (“arbitrage”).
  2. I undertook a cryptocurrency course offered by the “ivy league” University of Pennsylvania (“UPenn). If the experts were taking it seriously, maybe there was something more to it. This course helped me to understand the sector.
  3. I actually decided to test it for myself, putting aside little amounts in an online account. Some days it was pretty wild, but I have actually made gains – albeit when you want to convert your crypto to regular money (called “fiat”), the costs can be fairly high.

Before telling you about this sector, it is worth bearing in mind that the risk warning from the Government of Uganda/Ministry of finance is actually pretty reasonable and accurate, including from my experience:

  • If you invest in cryptocurrency and lose your money, for example from an unscrupulous trader, you have no recourse, unlike for example with a bank, where there are consumer deposit protection schemes.
  • Cryptocurrencies are very volatile.
  • It is quite literally a jungle out there – how do you know which coin is legitimate and which coin is worthless? Which coin is being used for money laundering and which one is just bad?

With this in mind, how do you go about investing in this sector?

First, you will likely need to find a reputable exchange when you set up your account. The most reputable ones include: Coinbase, Gemini and bit stamp. You will likely need to check if they accept Ugandan investors. If not, one I have previously researched and allows Ugandan citizens (as well as stock trading) is:  https://global.bdswiss.com/

So, with the above in mind, before you invest in this sector:

FIRST THE CONS (WHAT MIGHT HOLD YOU BACK)

1.  There are quite a number of coins and it is difficult to know which ones are legitimate.  

Owing to the number of coins, there is a level of technical knowledge you will likely need to have as well as do detailed research prior to investing.

Our advanced thinking tips to counter this?

Stick to the well-known coins. In the model/portfolio we present later on, we focus only on the largest (by trading volume) and best-known coins. These are Bitcoin (BCH), Ether (ETH), Litecoin (LCH) and Ripple (XRP).    Tied to this, stick to the well-known exchanges – Coinbase, Gemini and Bit stamp are well known and will themselves be regulated.

2. There is significant volatility

This is something that is just part of cryptocurrency, until they potentially stabilize.

Our advanced thinking tips to counter this?

Allocate a small percentage of your overall portfolio to cryptocurrency. If say you have $100,000 to invest, you might wish to allocate only 5% to all cryptocurrency. This protects you from the wild swings.

Another strategy is to diversify your portfolio within the coins you purchase. The 4 coins I mentioned above give you sufficient diversification, which reduces your risk to an extent and the model I provide later on uses such a strategy.

A final consideration is to follow what the crypto community follow: HODL: Hold on for dear life – meaning continue holding on for the long term as eventually the prices will rise continually, albeit with peaks and troughs.

3.  There is limited government regulation

While governments like the US have robust regulation of the sector, other jurisdictions may not be so well regulated and so there is room for investing scams.  I for example encountered a bitcoin mining investing opportunity being touted by a crypto expert but then this very opportunity from my research had a clear warning of a Ponzi scheme from the Philippines regulator.  It means that your investment is at stake and you might not have recourse, were you to lose your money.

Advanced thinking tips

Because crypto it is not regulated in many jurisdictions, your first step of due diligence is to carefully read the fine print on any website. Check whether the company or exchange is in a jurisdiction that is regulated and if so, by who. For example, if it’s in Cyprus, is the entity on the Cyprus Securities and Exchange Commission website?  Likewise, if it’s in Mauritius, is it on the Financial Services Commission – Mauritius list?  Regulated entities in regulated jurisdictions will typically have good controls in place, including over their cyber security to help protect you – including from cyber security breaches/hacking risks (if you lose your private key, you have lost your coins forever).

AND NOW THE PROS (A reason to smile)

1. Return on investment (ROI) is good and only increasing.

When my geeky friend sent me the $1 which increased to $40 by 2019, this was a 400% increase. This is how crazy this investment can get.

It was in the news recently that Bitcoin (BCH) had hit the $1 trillion market value mark and furthermore, it is increasingly common to read in the news that large financial institutions and companies are increasingly investing in Bitcoin, for example Tesla and Blackrock, the world’s largest asset manager.

In the model we have prepared, I reviewed at least 3 years of trends, reviewed experts’ forecasts and other information in order to develop our analysis to develop a Return on Investment (ROI) in this sector.

I have kept it in USD ($) rather than UGX (Shs) to protect the wild currency fluctuations of the Uganda shilling.

  •   This is calculated as follows:
    • Startup capital:  $10,000. (A)
    • Net profit: $14,944.52 (B)
    • Return on Investment (ROI) (years) (A/B) = 0.67
    • Return on Investment (%) (B/A*%) = 149%.

The model is here.

(clicking the link above will take you to a google drive excel document link).  In the model, I also include a clear risk warning about investing in crypto currencies, please be aware of it including the Ugandan guidelines.

And how does this sector compare with our other sectors profiled? See the full best sectors list here.

Final word

It is good for you to have an open mind about any sector – get educated, like I did in order to make an independent assessment. If you cannot handle the volatility, do not invest or keep your exposure low.

I cannot however emphasise the importance of doing your due diligence on the exchange you will use before you invest any amount of money into this sector, this is probably the most important step because it is really a jungle out there, but there are morsels you can get but if you do not navigate carefully – you will be mauled by the big bad wolf!

Otherwise, best of luck and of course if you need some help, do not hesitate to speak to us to get the ball rolling, Inachee after all represents Home Grown Energy in Motion.

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And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not solely rely on the information given here to base your investment decisions. You should seek business advice from a professional knowledgeable of your specific circumstances. I (or Inachee) shall therefore not be held responsible for any loss you may incur when acting on this information.

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