After Jamie Dimon’s controversial comments last week labelled Bitcoin as a ‘fraud’, the cryptocurrency has one again hit the headline news.
Initially a complicated, secretive ‘currency’ used by drug-dealers and black market buyers, interest in bitcoin has surged dramatically over the last couple of years. Launched in 2009, Bitcoin is the “first decentralized digital currency,” according to bitcoin.org. Whilst its anonymity initially caused its rise to fame, it has hit the mainstream, becoming a talking point for investors globally.
But should you be investing?
As recently as January, prices were below $800 – but have more than doubled since April, after Japan moved to legalize the cryptocurrency as a payment method and Russia announced that it was seeking to regulate it too. Since then, Bitcoin seems to have replaced gold as the “safe-haven” default, benefiting whenever political chaos hits the markets as it operates without government influence from any country.
Whilst they are subject to increasing investor interest, the fact remains that Bitcoins are rare – which could make them a sound investment for the future. Right now, around 80 percent of all bitcoins are already mined and no new ones will appear after the year 2040. This scarcity could continue to drive up demand, especially if central banks decide to start buying them as foreign currency reserves.
Big financial institutions have also given the green light to the currency, with both Fidelity and Hargreaves Lansdown offering their investors exposure to Bitcoin.
Clearly, there’s potential to make some big money. However, as fast as its price can move up it can move down; investors should be aware that there’s the potential to lose a lot of money as well.
Cons to Bitcoin investment
Bitcoin is a mathematical algorithm. It’s not something you can hold in your hand. Its value is based entirely on your trust in the math, the exchange and the willingness of the market to accept it.
Whilst Bitcoin’s original draw was its anonymity; however, users identities on the platform are not entirely hidden. Whilst you will not need to disclose personal identity information in a bitcoin transaction, nor provide a credit card number that could be stolen, every transaction performed with bitcoin is visible on the distributed electronic public ledger known as the block chain. From this, it could be possible to determine a transaction’s origin.
What rises quickly can also fall quickly. When the government rejected an effort to create a Bitcoin-based exchange-traded fund in March, the price of Bitcoin on the Bitfinex market plunged by almost one-third in just more than a week – making it far more volatile than traditional currencies moving within a small range. Alongside that, it is also vulnerable to hackers, with no backstop central bank to provide security.
With Bitcoin being a relatively complicated investment, several vehicles have hit the market allowing investors to dabble in a more simple way. The most famous of these is the Bitcoin Investment Trust, which is designed to track the asset price; but actually trades at a significant premium compared with the underlying holdings. This makes it a “disaster waiting to happen” according to Sumit Roy in an analysis for ETF.com.
Whilst many bitcoin fans lambasted JP Morgan boss Jamie Dimon for saying bitcoin was “not a real thing”, it is worth remembering that Bitcoin is just a mathematical algorithm; its value is based entirely on math, the exchange and the willingness of the market to accept it. This inherently makes it a risky investment. However, as long as you bear that in mind, there could be a place for bitcoin as a part of a balanced investment portfolio – and it could just be the investment bringing home the largest returns.