Bitcoin – What do you Need to Know?

Read any article about investments over the past 12 months and you will probably find that Bitcoin features.

There’s no doubt that Bitcoin has performed remarkably to date, with early investors generating staggering returns over a relatively short period.

Considering the sheer number of column inches dedicated to Bitcoin, it’s no surprise that everyday investors are sitting up and paying attention; wondering whether they should invest before they ‘miss the boat’. As with any form of alternative investment, the risks associated with investing in Bitcoin are high.

Here we look at Bitcoin in more detail.

What is Bitcoin?

Created in 2009, Bitcoin was the first global cryptocurrency and was created by an anonymous individual who is now known under the pseudonym of Satoshi Nakamoto.

As a virtual currency, Bitcoins aren’t printed; individual Bitcoins are created by computer code. To receive a Bitcoin, a user must have a Bitcoin address – a string of 27-34 letters and numbers – which acts as a virtual post box. You can then set up a virtual wallet to store, keep track and spend your digital money.

In a world where everything is going digital, some view Bitcoin as the future of currency. However, due to the anonymous nature of Bitcoin ownership and trading, it is being used to conduct illicit activities. This has created a dark cloud over all cryptocurrencies.

Should you believe the hype?

There are two sides to every story and alongside the reported positives of Bitcoin, there are numerous negatives. The volatile nature of cryptocurrencies means that they have the ability to plummet as quickly as they shoot up.

The main drawbacks of cryptocurrencies such as Bitcoin are as follows:

  • Cryptocurrencies are not regulated financial instruments so they do not have the consumer protections associated with traditional assets. For example, the Financial Services Compensation Scheme does not cover Bitcoin investments.
  • The value of cryptocurrencies is extremely volatile. They are vulnerable to sharp changes in price due to unexpected events or changes in market sentiment. The value of some cryptocurrencies recently fell by more than 30% in a single day.
  • With any ‘get rich quick’ strategy, there are those that will look to take advantage of naïve investors through unscrupulous means. As cryptocurrencies are unregulated, the potential for fraudulent activity is heightened. At the risk of sounding trite, the saying ‘if it sounds too good to be true, it usually is’ might well apply here!

It should also be noted that any investment in Bitcoin leaves you effectively wading into unchartered waters. For this reason, investment in Bitcoin has been likened to gambling, with Andrew Bailey, chief executive of the UK’s Financial Conduct Authority (FCA), recently issuing the following caution: “If you want to invest in bitcoin be prepared to lose your money – that would be my serious warning”.

Our advice

Predicting the future for Bitcoin or any other cryptocurrency would require a crystal ball. In general, our advice is to think very carefully about Bitcoin, or any other cryptocurrency linked investment strategy, before ploughing in. Past performance is not an indicator of future performance and Bitcoin carries as much risk, and arguably even more, than other forms of investment such as equities or other commodities. If you do choose to gamble on Bitcoin, be sure to follow a tried and tested route. You should consider what you are willing / can afford to lose, and remember that long term sustainable returns are best generated via a balanced portfolio of investments.

NB. The value of investments can fall as well as rise. You might not get back what you invest.

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