There can be few adults who haven’t heard of Bitcoin, cryptocurrency or digital tokens. They have been all the rage in recent years. You can tell by the 320m or so Google tags on the internet. Fish and chips only has 194m tags and that’s been a popular dish for decades.
I’m using Bitcoin as the collective term for all similar digital currencies like Dogecoin, Ripple, Aeternity and Ethereum to name just a few.
Should you buy Bitcoin?
You need to decide if Bitcoin is an investment, a game, a craze, a fad or a gamble. Ignore for now the media stories about who has made money from buying Bitcoin over the past few years. Start from right now, and the cash in your bank, and consider the future risks and returns of swapping your UK pounds for a Bitcoin or two.
If you have convinced yourself that Bitcoin is an investment, you should consider this article by Angela Monaghan of The Guardian before you start.
Bitcoin and other cryptocurrencies are “wild west” assets that expose investors to a litany of risks and are in urgent need of regulation, MPs on the Treasury select committee have said.
The committee said in a report that consumers were left unprotected from an unregulated industry that aided money laundering, while the government and regulators “bumble along” and fail to take action.
The Conservative MP Nicky Morgan, the chair of the committee, said the current situation was unsustainable.
“Bitcoin and other crypto-assets exist in the wild west industry of crypto-assets. This unregulated industry leaves investors facing numerous risks,” Morgan said. “Given the high price volatility, the hacking vulnerability of exchanges and the potential role in money laundering, the Treasury committee strongly believes that regulation should be introduced.”
Unlike UK regulated conventional investments, crypto-assets are not covered by the City regulator, the Financial Conduct Authority (FCA), and there are no formal mechanisms for consumer redress or investor compensation. That’s not a good start is it?
Rather than an investor, are you really a speculator, hoping to trade in and out of Bitcoin based on short-term pricing volatility? There’s no right or wrong here, but clarity of objective is a good start. What are you trying to do?
There is a good article here which aims to explain the distinction between investing and speculating. It isn’t easy.
The UK’s National Lottery is one example. People ‘play’ the lottery (as in a game); they don’t ‘invest’ in the lottery. Think of it more like roulette and poker - a bit of a gamble.
How risky is investing in Bitcoin?
Here’s what the FCA had to say recently: “The FCA agrees with the committee’s conclusion that Bitcoin and similar crypto-assets are ill-suited to retail investors, and as we have warned in the past, investors in this type of crypto-asset should be prepared to lose all their money.”
Be prepared to lose all (your) money. Ouch! That doesn’t sound like an investment, does it? There are winners as well as losers and the internet is full of articles about individuals who have made their fortune. This article covers some winners and losers of 2017. Make of it what you will.
How much should you spend on Bitcoin?
Not put off by the “lose all your money” talk, then? At the time of writing (prices may change) one Bitcoin will cost you about £4,843.
Here are two headlines taken from my Google search, just six weeks apart.
Bitcoin experiences biggest price gains in months.
www.independent.co.uk 23rd July 2018
Bitcoin price crash: Cryptocurrency market in meltdown.
www.independent.co.uk 6th September 2018
If you like new things and want an exciting flutter, you could fly to Las Vegas and hire a Tesla for a weekend. That sounds like fun. Or you could buy some Bitcoin, and grit your teeth and wait. But only buy what you can really afford to lose (and I mean really lose). And tell your spouse or partner, and family if you have one, what you plan to do before you do it. Go open and go loud.
This is real: the Fear Of Missing Out. The person who stood by while friends got rich. If you are a FOMO type and like to be engaged, then by now you could have made, or lost, fortunes already and probably already have some Bitcoins secreted away somewhere safe.
If this FOMO person isn’t you, and you aren’t already extremely wealthy with money to burn, then Bitcoin probably isn’t for you. Ignore it and it may go away.
The Greater Fool theory
The Greater Fool theory has been around for a very long time (think Dutch tulips). The theory states that the price of an ‘object’ is determined not by its intrinsic value, but by irrational expectations and beliefs of other market participants. The price can be justified by a rational buyer in the belief that someone else will pay an even higher price for it.
It is widely accepted that Bill Gates is no fool. But like all mortals, he has been wrong before.
It’s not all bad news
Like Las Vegas and its 39m visitors in 2017, Bitcoin and other cryptocurrencies (or as Chris Burniske calls them, crypto-assets) generate a lot of employment around the world, with work for coders, programmers, marketers, lawyers, and economists. That’s a positive thing, right?
Some Bitcoin fans are hedging their bets that if there is a global investment market meltdown, or a run on a major global currency, Bitcoin will bring stability. Who knows?
At Capital we understand the differences that investing and gambling can make on your life. If you like a flutter, only play with what you can really afford to lose. Be careful out there.
- The value of investments can fall as well as rise. You may not get back what you invest.
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