You cannot fail to have seen the fervour over Bitcoin recently. The mystical cryto-currency that has returned investors near 1100% during 2017 (after a pretty flat performance in previous years).
This week alone, I have been asked numerous times by clients about whether this is a suitable investment for them or not. My answer would be the same no matter what the investment is…it depends!
Firstly, we need to strip away the gold rush mentally around Bitcoin at the moment, and look at the fundamentals of why anyone would want to invest.
An initial conversation would always centre on some key questions and pointers:
- What is your attitude to risk, and capacity for loss?
- Do you need access to the invested funds, and if so how quickly would access be needed?
- How long would you like to invest for?
- Before you invest, do you have a clear understanding of how and what you are investing in?
These are the core principles of any investment conversation. There are no right or wrong answers, but the direction of travel may be different, and remember NOBODY invests with the benefit of hindsight!
Specifically, in relation to Bitcoin, do you understand what it is? In a nutshell, Bitcoin is a virtual currency, developed in 2009, and is not tied to any physical assets (e.g. gold) or currency. It finds its own value in its own market. Gradually more and more companies accept Bitcoin payments, but many are skeptical about holding a virtual asset in exchange for actual goods or services, and certainly many large institutional investors have stayed away fearing the volatility.
Surely such huge growth cannot possibly last or even be sustainable? Well, who can tell. This is uncharted territory. Equity prices and commodity prices are of course linked to something tangible. The nearest recent example of this type of investment, without a specifically valued asset, would be the so-called Dot-Com bubble of the 2000/1, where tech firms rose so dramatically in price until the tide suddenly turned and because there was no real tangible value, share prices crashed. Now that’s not to say that Bitcoin will not continue its meteoric rise – only time will tell.
So you want to invest, how do you do it? this is the tricky part, and the part that is fraught with danger from scammers hidden among the genuine companies.
- Source a ‘wallet’ – It is your responsibility to buy, and hold, your own Bitcoins. There are several bitcoin wallet providers, and always make sure you complete two-factor security, ideally using a security key, or, for example Google Authenticator.
- Once you do this, buy your Bitcoin using a debit or credit card – and this can get very risky. Not only is Bitcoin a seriously risky investment, but it is also massively targeted by criminals. There are examples of Bitcoin wallets being targeted. Proceed with caution.
- Once you have a wallet and have bought coins, or part of coins, you can transfer Bitcoin between users from your PC/Mac or mobile. There are examples of people losing their Bitcoin investments when they’ve lost their hard drives.
How are Bitcoins created? Bitcoins are ‘mined’ by users, or more likely specialised software, which is linked to a user’s activity.
So, is Bitcoin just a con? Well no it isn’t. It is real and being used by real people and real companies daily. In my opinion, it is an investment that most people don’t fully understand, and does not respect the traditional investment boundaries. We really are breaking new ground here.
Is it right for you? Well it could be, but as I mentioned above, I would always follow the same investment principles and take the right advice.