One of the biggest topics in 2017 was of course Bitcoin. Everyone was going crazy for it and trying to get in on the gold rush. So far cryptocurrency has not appealed to me. Partly because I don’t feel I truly understand it enough but also because as this stage it’s more speculating than investing. With an investment you can calculate expected returns but with Bitcoin you are just betting that someone else is willing to pay more for it than you did. When it comes down to it, what do you really own?
At this early stage it’s impossible to tell exactly how blockchain technology will settle into the world and which cryptocurrencies will go the distance. At the moment cryptocurrencies are springing up everywhere but surely only a few will survive. Just because Bitcoin, Ethereum, Ripple etc. are the biggest at the moment, it doesn’t mean they will all survive. Furthermore, how will they react during the next global downturn? Bitcoin is often referred to as digital gold. In an economic downturn investors see gold as a safe haven – will they see Bitcoin in the same way?
Since Bitcoin peaked in mid-December at almost $19,000 a coin the price has fallen more than 50%. Is this just a blip or is the buying frenzy over? When the price was rising week after week everyone wanted to get in on the action but how many people are as keen when they have seen a 50% drop? As Bitcoin has no earnings and does not pay a dividend, what other reason do you have to buy other than to see the price increase? If you bought at the December highs you would now have to see an increase of more than 100% just to break even!
For those who bought high and have since seen Bitcoin’s price drop, what is the next move? Do they hold and hope the price starts to climb again? Do they sell and cut their losses? Do they try to “buy the dip”? When the share price of a company drops significantly you can reassess the situation and see if any fundamentals of the company have changed. With Bitcoin there is no such luxury. Until we know the long term role of Bitcoin and cryptocurrency in general, it’s difficult to call it an investment. With an investment you should be able to anticipate expected returns. If you cannot do that then it’s no safer than gambling. Don’t get me wrong, people make money gambling, they just generally lose a lot more.
On Instagram I see an incredible number of accounts claiming to be able to help people make money from Bitcoin and other crypto’s. As a platform used mainly by the younger generation, it worries me just how many young people with little or no investing experience will be risking money in the hope of large returns. Not only that but there is also the risk of scams and hacking of cryptocurrency exchanges to think about. For many, I see a very unhappy ending. The saying goes that if it was that easy, everyone would be doing it. Well everyone is doing it – so what now?
Let’s say you are sat in a room full of people and everyone is seated (don’t ask me what you are there to see, use your imagination!). You want to get a better view so you decide to stand. A few other people scattered around decide to do the same and for a short while the small number of people standing have a great view. Life is good. The problem is that everyone left seated realises you have a great view so they too decide to stand. Before long the whole room is standing and now you all have just as good (or bad) of a view as when you were seated. The edge has been lost and the game is up. Who knows, maybe people will completely lose it and start throwing chairs at each other (this I might pay to watch). All I know is that I don’t want to be in the middle if they do.
Time will tell what the future holds for Bitcoin and the other cryptocurrencies. Whilst I believe there is a future for blockchain, I currently have no interest in betting on it. For those with little or no investing experience, I would urge you to avoid it too. If you are determined to get in on the action then I would recommend you read the recent article I wrote on diversification.