Bitcoin has fallen more than 20 percent from its peak in recent days. Does that mean the party is over for encryption currencies?

Before we consider whether the party has ended for cryptocurrencies, we should first ask ourselves: what investment value do cryptocurrencies really hold?

Despite being a kind of currency, they are not used for payments of goods because there are no mainstream businesses that allow customers to pay using encrypted currencies. This is simply because these currencies are far too volatile and carry great risks to merchants.

Cryptocurrencies are also inappropriate as a hedging tool. Though the US dollar, euro and other major currencies have been affected by monetary policies of the Fed and the European Central Bank and continue to face downward pressures, it is difficult to use bitcoins or other digital coins to hedge against their depreciation because they are much more volatile when compared to traditional money.

Large corporations have shied away from putting their cash in bitcoins apart from Tesla, whose founder Elon Musk recently revealed that the electric car-maker had invested US$1.5 billion (HK$11.5 billion) in the cryptocurrency. Also, there is no country that keeps any of its reserves in cryptocurrencies.

There are two possible reasons why bitcoin recently hit a new high of US$58,000.

1 Vision of the future: everyone believes that traditional currencies will become history and that bitcoin and others digital assets will become the mainstream currencies in the future.

2. The celebrity effect. When Musk embraced bitcoin, the disbelievers became believers, thinking that bitcoin did indeed have value, but they had lacked Musk's foresight. Therefore, it would be a mistake not to follow the super-rich and buy bitcoin, which has been on the rise from the third quarter of last year.

It is understandable if people make the investment in the belief that bitcoin will become the mainstream of currency of the future.

But if they make the investment because of the celebrity effect, then they should pay attention to two key points.

Firstly, Musk did not invest in bitcoins with his own cash but with Tesla's funds.

Also, the US$1.5 billion is just 0.23 percent of Tesla's market capitalization and therefore the proportion is very low.

Secondly, the European Central Bank, only last month, had warned investors they may lose everything by investing in bitcoin.

Also, the new US treasury secretary Janet Yellen pointed out last week that bitcoin is being used by drug dealers to launder money and to fund terrorism.

Countries all over the world have begun to strengthen their regulations on cryptocurrencies and as these laws get stricter it will cause a precipitous fall in these currencies. So investors must remain wary.

Of course, there are still a lot of investors following Musk, believing that since he is bullish on cryptocurrencies, the prospects for cryptocurrencies remain good.

But when Musk has only invested Tesla's cash in bitcoin, and the amount is such a small fraction of Tesla's market value, it is clear that the billionaire is just playing a game.

Musk has also been tweeting his support for dogecoins and there are many investors who do not believe he is doing this for his own amusement.

While he may have spent between US$100 million and US$200 million on dogecoins - an astronomical sum for the common man - this investment would be small change for him, as one of the world's richest men.

Hence, even if investors find it difficult to find new avenues for investment at present, it may not be wise to follow the investment trends of the super-rich, who have money to burn.

The wealthy are willing to take extremely high risks but their risky investments are only a tiny fraction of their total wealth.

So even if the common man wants to follow these celebrities, they should not pump more than 10 percent of their total savings into such investments.

Andrew Wong is chairman and CEO of Anli Securities

Bitcoin punters risk getting fingers burnt