You may have read an article by CNN stating that Bitcoin was the best investment of the decade. The article states that if you have bought the cryptocurrency at the beginning of 2010, by the end of 2019 you would have made a 9,000,000% increase in your cash. However, if you had managed to sell your Bitcoin when it was at its highest point, you would have been looking at an increase of more than 32,000,000%.
That’s a lot.
So with this in mind, should you have invested in the cryptocurrency? Should you invest in it now? Here are a few things to consider before you do…
You could have become a billionaire or lost everything
There are several very vocal advocates for the cryptocurrency. And from their point of view, it’s easy to understand why they love it so much; they invested early and made a killing. But unfortunately, that’s not the experience all investors had…
Bitcoin is a speculative instrument. This means that people invest because there is a chance of huge gains, but this comes at the risk of huge losses. As a result, the ride so far has been very bumpy and by the time a lot of people caught on and invested, the bubble was ready to pop...
Let’s take a quick look at how the cryptocurrency performed between January 2017 and December 2019:
Bitcoin is unpredictable
While a company can be valued by how much money is coming in, its assets, how much it is spending, cash, debts, patents etc, there is no reliable method by which to value Bitcoin. So what affects the price? In short, supply and demand. But anything can affect this, making it difficult, if not impossible to predict what will happen in a day, a month, a year.
Let’s take a look at a few events that have affected price in the past:
1. Governments
The fact that Bitcoin is supposed to transcend any one government means that its price can be affected by any one of them. Governments have struggled to decide whether the cryptocurrency is friend or foe and so we have seen a range of harsh laws be put into place to make trading difficult or even criminal. In 2017, China forbade cryptocurrencies and Initial Coin Offerings (ICOs), causing the price to plunge.
In some cases, just the rumour of harsher laws was enough to send the price spiralling. For example, in 2014, when a false report stated that China was uncertain about how to regulate Bitcoin. In contrast, Iran’s acceptance of the cryptocurrency caused the price to spike.
2. Big Players
Bitcoins are produced at a fairly predicted rate and as a result, only so many exist at any one time. However, these are not spread evenly. Some investors will hold large chunks and may have no desire to trade, making those available rarer and more expensive. On the flip side, one of these traders could just as easily dump a large number of Bitcoins, causing the price to crash. As a result, the market could be easily manipulated and in 2018 the U.S. Department of Justice began to investigate traders suspected of doing just that.
3. Criminals
Most of us will have heard of the original dark web marketplace, Silk Road. Well, it was one of the first online portals to use Bitcoin as its primary source of currency, leading to quite a horrible reputation for the cryptocurrency. But, when Silk Road’s CEO was arrested, Bitcoin received some relief and the price shot up from $100 to over $1,000.
Bitcoin used to be seen as the ideal currency for criminals due to the difficulty of tracking its owners. This caused trouble for governments and leading some to take steps to change this. In 2018 South Korea, the world’s fourth-largest market for Bitcoin trading, stated that all traders have to reveal their identity.
4. Hackers
Bitcoin wallets are only safe if they cannot be hacked. Unfortunately, their walls have been breached many times, with tens of millions of pounds stolen at a time. On other occasions, the owners of the wallet decided that they would be better off holding other people’s Bitcoins. So, they shut down the wallet and kept the contents… Oh, and then there are the employees of the wallets who walked off with millions of pounds worth of other people’s Bitcoins.
These events have not only hurt investors’ wealth and Bitcoin’s reputation but naturally, its price.
5. Exchanges
Bitcoin trades on many different exchanges. Each one is affected by its own supply and demand, meaning that at any given time you could have several different prices for the same thing.
UK regulation is complicated and unclear
At the time of writing, the FCA does not regulate exchange tokens unless they provide you with certain rights, at which point they become security tokens. This means that if you invest in Bitcoin with an unregulated firm and that firm loses your money, you can’t get it back.
Also, as a warning to those of us who are thinking of jumping on the Bitcoin bandwagon, the FCA has proposed a ban on the sale of crypto-currencies to retail customers “due to our concerns surrounding the volatility and valuation of the underlying cryptoassets.”
Lastly, depending on what you’re doing with your Bitcoin or how you’re getting them, the tax implications can be complicated and nobody wants to be on the wrong side of HMRC.
A high return on investment is not necessarily a good investment
…So, while on the face of it Bitcoin may have seemed like a good investment, was it worth the risk?
We have already seen just how drastically Bitcoin’s price can swing at the drop of a hat. Essentially, this volatility means more unpredictability. So for those of us who would like to be able to plan for the future with a little more stability, it may be worth considering better ways to beat the savings trap.
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With investing your capital is at risk. ikigai is not a bank.
The value of your portfolio with ikigai can go down as well as up and you may get back less than you invested. Returns are not guaranteed and any historical returns, expected returns , or probability projections referenced on our website may not reflect actual future performances. You should seek financial advice if you are unsure about investing.
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ikigai is a trading name of Ikigai Invest Services Limited, a company registered in England and Wales (Company number: 12011662). Ikigai Invest Services Limited is registered with the Financial Conduct Authority (FCA) as an EMD Agent (reference number: 902740) of PayrNet Limited, an Electronic Money Institution authorised by the FCA (reference number: 900594) and is an appointed representative of WealthKernel (reference number: 723719) which is authorised and regulated by the FCA. ikigai is not a bank. Registered address: 16 Great Chapel Street, London, England, W1F 8FL.
