“With interest rates low, many investors are looking around for alternative schemes which may yield greater returns. But you shouldn’t be investing in cryptocurrencies like Bitcoin if you don’t understand the risks” says Grant Buchanan, Financial Planning Partner.
What is Bitcoin?
Cryptocurrencies, of which Bitcoin is one, are digital currencies which are not physical coins or notes, but exist as a string of computer code. It is bought from a Bitcoin crypto-currency exchange (there are many) and is then held in a digital wallet. The bitcoins can then be stored, exchanged or spent in online transactions.
How does it work?
Bitcoin runs on open-source software technology known as blockchain, which enables digital property to be transferred between internet users. There is no one organisation (such as a bank) behind the transactions, but they are recorded and linked through a kind of public ledger which is updated by any Bitcoin user. This transparency is supposed to ensure that the transfer is safe and secure, although the incidence of crypto theft and fraud is rising and digital asset intelligence firm CipherTrace has said that in the first 5 months of 2020 the value of cryptocurrency crimes had already reached almost $1.4 billion.
Have Bitcoin investments done well?
The value of Bitcoin has fallen since their peak in 2017, when one Bitcoin was worth $19,800. In October 2020 one coin was worth $10,800. Prices continue to fluctuate, and it could be argued that since there are a finite number of Bitcoins which can be supplied, a limited supply of a desirable product will always generate demand. However you should remember that cryptocurrencies are only a digital representation of value, and they aren’t guaranteed by any bank or public authority, so don’t hold the same legal status as money.
Any other things to remember?
Firstly, and I cannot stress this enough, cryptocurrencies are unregulated. There are no rules. You could lose everything tomorrow and your financial adviser, bank, Financial Conduct Authority and the government will all be powerless to help you. Secondly, several countries where Bitcoin appeared to be gaining validity are now backtracking and influential investment figures such as Warren Buffett have urged caution. “In terms of crypto-currencies generally, I can say with almost certainty that they will come to a bad ending,” he said in a recent interview.
For most people, the proven strategy of buying into a well-diversified portfolio is a better and safer course of action. The old adage of not putting all your eggs in one basket still rings true. Buying into real assets which can be traded on an open market and well traded exchanges will ensure that you own real assets with a true value. Whilst the range of investment options available is larger than ever, you should remember that there are always risks. That is why seeking advice from an independent and chartered financial planner to get a deeper understanding of what you are buying has never been so important.