There has been much talk (and excitement) recently about a thing called Bitcoin – because it has, on the face of it, huge value.
Bitcoin is a “cryptocurrency”. It exists only as data and is created by massive farms of computers solving highly complex mathematical problems.
Anyone can buy Bitcoins – or parts of them, given that a whole one costs around £12,500 at the time of writing this. It is a fairly technical process, but once you’re set up, purchasing is just like, for example, ordering foreign currency online.
The big question is, should you be buying Bitcoins at all?! Are you missing the boat if you don’t get involved?
The original cryptocurrency, Bitcoins have increased in valued by thousands of percent and have been rocketing day by day for a number of weeks now. To some minds that might make them an investment target. It can seem a shame to miss out on what seems like an amazing opportunity.
There are two big problems though: firstly, if you don’t have Bitcoins already, there’s a more than fair chance that you’ve missed the boat by a long margin if you thought you were going to make a killing; secondly, Bitcoins are essentially a gamble.
Unlike other types of asset they are not backed by anything. There’s no bank or nation state standing behind them, nor property or anything else tangible. They really trade on faith – the faith of investors that they will continue to be in demand.
There have been five big (really big!) corrections in the value of Bitcoin during it’s relatively short existence and the next one could come at any time.
In essence, for the time being at least, we would say that cryptocurrencies should best be viewed as a bet. If you invest in them you should do so in the knowledge that you are putting the entire amount of that investment at risk. The value could grow and it could pay off – or you could lose everything you’ve put in.
There’s also the consideration that if it does look like paying off and you achieve growth in your investment, the spectre of a crash is always there, so you have to make a hard (if not impossible) call on if and when to sell and realise any benefit. It’s a real rollercoaster ride.
It is true that all investments carry risk. Companies can fail, properties can lose value, governments and banks can fall. But they are at least regulated and monitored and there are often signs when something is liable to go wrong in any really significant way. Wise investors spread their risk, so that no one event makes an over-weighted impact on their holdings.
Bitcoin and other cryptocurrencies are fascinating and if you want to know more about a type of currency that might be an important part of our future, we’d suggest dipping your toes in it with a play-sized stake – put maybe £20 in to see what happens with it, as long as you’re comfortable losing all of it.
If it doubles in value, all well and good, but instead of kicking yourself for not putting in more, be comfortable in the knowledge that it could just as easily have gone the other way.