Even as union finance minister, Arun Jaitely, has officially declared cryptocurrency like bitcoin not a legal tender in India, many local (J&K) investors have continuously been approaching for guidance in investing this virtual currency. “A friend approached me. He asked to invest in bitcoin. Should I do?” This is what one of the emails that I received reads. Most of them have expressed their eagerness to invest in cryptocurrencies because a friend or an acquaintance has recommended it and some of them have quoted some unknown analysts suggesting them ‘to harvest wealth quickly’ by investing in virtual currencies.
So, in the backdrop of some ‘non-professional’ investment recommendations, appetite of local investors to park their money in virtual currencies seems rising high. The eagerness to invest in such currencies that too in an environment where future of cryptocurrency in India hangs in balance after being declared illegal tender in the country is most surprising.
Actually I am privy to situations in the past where many gullible local investors were misguided by self styled market analysts. These pseudo-analysts made them to invest randomly in stock market only to see their investment wiped out in the market fluctuations.
Basically ours is a place (Kashmir) where there’s limited or negligible information regarding stocks and their movement made available to investors. Moreover, we don’t have credible professionals in the local market scenario who can guide investors on buying and selling of shares or suggest investment in cryptocurrency like bitcoin. Unfortunately, we mostly find quacks working as market analysts/experts.
Here it makes a sense to share a few lessons of precautions to be taken by the investors while listening to investment recommendations from different corners.
Professional analysts hold a key position in stock market. They are the players who drive investors’ sentiments in a particular direction. We have ‘sell-side’ analysts typically working for prominent brokerage firms and also provide investment banking services for corporate clients—including companies whose stocks and securities the analysts cover. Then there are ‘Buy-side’ analysts working for mutual funds, hedge funds, or function as investment advisers. We have also ‘independent’ analysts who often sell their research reports on a subscription basis. They market themselves as more independent, emphasizing their lack of conflicts of interest.
Network of television channels has eased the interface of these market analysts and the investors. Now we see dozens of business television channels dishing out live updates in the global markets coupled with ‘buy & sell’ recommendations of stocks of different companies. The analysts make full use of the power of television medium to exert considerable influence in today’s marketplace. We have seen that the analysts’ recommendations or reports influencing the price of a company’s stock—especially when the recommendations are widely disseminated through video or any other electronic medium.
Now the most important question: How much an investor should bank upon the recommendation of these analysts? Of course, analysts in today’s markets are key to important source of information. But investors should understand the potential conflicts of interest they might face. Some analysts work for firms that underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover—either directly or indirectly.
So what matters is investor’s own application of mind while playing in the markets. You as an investor should not exclusively rely on an analyst’s recommendation when deciding whether to buy, hold, or sell a stock. Instead, you should also do your own research about the company whose stocks you are going to purchase. Don’t overstep your financial circumstances while making a decision to invest in financial market.
However, an analyst may have a conflict of interest, but it does not mean that his recommendation is always faulty. It’s up to you as an investor to assess whether the recommendation is wise for you. You should educate yourself to make sure that any investment you choose matches your goals and risk bearing capacity.
Meanwhile, in the context of investment in cryptocurrencies, let me conclude by reproducing the latest financial voice to raise questions about the legitimacy of digital currencies such as bitcoin. A few days back, the World Bank Group President Jim Yong Kim compared cryptocurrencies to Ponzi schemes – a financial product in which investors are paid from money collected from new investors instead of the scheme’s earnings. The scheme runs as long as new investors keep investing in the scheme. Once the new investments stop, these schemes collapse on themselves.
(The views are of the author & not the institution he works for)