Is bitcoin a real investment?

Bitcoin and other cryptocurrencies have been in the news a bit lately mainly due to their meteoritic rise in value as of late. This has led to some interest from our clients about this type of currency and whether they should invest in it.

To start off, it may be worth briefly explaining what a cryptocurrency is. Without going into too much detail, a cryptocurrency is a digital currency (i.e. money) in which encryption techniques are used to regulate the generation of the currency and verify the transfer of the funds. They operate independently of banks and countries and are therefore the world’s first true universal currency (excluding gold and other precious metals). Bitcoin is the most well-known cryptocurrency but there are many different types of cryptocurrencies being released all the time. These include Ether, Litecoin, Ripple and my favourites based solely on the name, Dogecoin (named after the meme) and Coinye West (named after Kayne West).

So are these a good investment? Like all things when it comes to money, the answer is… it depends. It is tough to compare these to other investments. The closest type of investment is currency trading. This is where you buy a currency in the hope that market movements against your currency will allow you to sell it at a gain. This type of investing is starting to stray into gambling territory as you are taking a bit of a punt that they will go up in value.

The different cryptocurrencies also present different risks. For example, Bitcoin is now accepted as payment at a number of places across the world. If you buy bitcoin and it goes down in value or nobody wants to buy it off you, you can hopefully use it to buy something to mitigate your loss. This is more closely linked to the same risks currency trading exhibit. In the alternative, many cryptocurrencies aren’t accepted anywhere. Therefore they are only worth what people are willing to pay for them and if tomorrow everyone decided to stop buying them, you would be left holding a whole lot of nothing losing your entire ‘investment’.

One thing also to be conscious of with cryptocurrencies is that they are being traded by amateurs. In normal investment markets, you can count on some level of logic to prevail as the investors are professional investors who are unlikely to buy terrible investments (although there is always exceptions). With Bitcoin and other cryptocurrencies, the amateur traders of these will behave unexpectedly. This is why the currency is currently rising in value despite many respected commentators suggesting that buying these is a crazy idea.

So what is my personal view? Well, I wouldn’t touch these with a ten foot pole and I would encourage others to avoid them unless they want to simply gamble. This sentiment was backed by the CEO of JPMorgan Chase, Jamie Dimon who just last week described bitcoin as a fraud. Dimon commented that any JPMorgan trader who was trading bitcoin would get fired in a second not just because it was against the rules of the bank, but also because they ‘are stupid’. After Dimon’s comments, bitcoin fell in value showing the volatility of the cryptocurrency.

Generally when we recommend investments to our clients, our investments include things like shares and listed property. Taking shares as an example, if you buy a share, you become a part owner of a company. Whilst that company’s stock may go up and down in value based on what people are willing to pay for it, at the least, as it’s a company, it will continue to earn revenue and possibly distribute that revenue by way of distributions to its shareholders. That way, if the stock goes down in value, it doesn’t mean you lose your investment. Investing in a cryptocurrency is a win all or lose all situation. Either you’re the lucky one that holds it long enough and then offloads it onto some unsuspecting chump at a profit, or you’re the unsuspecting chump that buys it and can’t sell it when people give up on it.

Once again, if you have any questions please feel free to get in touch with us.

This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.

Posted in: Cara Brett, Financial Planning

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