To Bitcoin or Not to Bitcoin?
6 June 2018
Bitcoin is a virtual currency that has been a constant source of interest and confusion since it thrust itself into the mainstream in 2009, created by an unknown person using an alias. Transactions are made with no middle men – meaning, no banks!
Bitcoin is not an official currency; however, can be used to buy merchandise anonymously. In addition, international payments are easy and cheap because bitcoins are not tied to any country or subject to regulation.
Much of the hype around Bitcoin is about getting rich by trading it, with some people just buying bitcoins as an investment, hoping that they will go up in value.
The value of bitcoins skyrocketed in 2017 to approximately $20,000 a unit leading many people who have never previously taken investment risk with their savings to ask ‘how can I buy them?’
But as with all investments, what goes up, can and will come down. It is worth knowing that the price of a bitcoin can unpredictably increase or decrease over a short period of time due to it’s young economy, novel nature and sometimes illiquid markets. In the last month it has experienced a 50% fall in value to just under $10,000creating a surge of speculation and worry.
Investing your savings in bitcoin is not recommended. Bitcoin should be viewed in the same way as any other high risk assets i.e. you should never invest money that you cannot afford to lose.
Bitcoins are stored in a “digital wallet,” which exists either in the cloud or on a user’s computer. The wallet is a sort of virtual bank account that allows users to send or receive bitcoins, pay for goods or save their money.
But security can be a concern. There have been reported loses in bitcoins worth tens of millions of dollars. If you store your wallet in cloud servers these could be hacked and if your wallet is on a computer you can accidentally delete them or viruses could destroy them.
Andrew Bailey, Chief Executive of the Financial Conduct Authority stated "If you want to invest in bitcoin, be prepared to lose all your money”. Bailey said a lack of backing from Governments and Central Banks for the world's most popular digital currency was evidence that putting money into bitcoin was not a secure investment. He also said buying bitcoin was akin to gambling because it had the same level of risk. Bailey also cautioned people that relatively little is known about what informs the price of bitcoin.
JPMorgan Chase CEO Jamie Dimon called bitcoin a "fraud" that would eventually blow up, while billionaire investor Warren Buffett urged traders to "stay away from it," calling the rally a "mirage."
No one knows what will become of bitcoin. It is mostly unregulated; however,many jurisdictions still require you to pay income and capital gains taxes on anything that has value, including bitcoins. It is your responsibility to ensure that you adhere to tax and other legal or regulatory mandates issued by your government.
In my opinion there are still too many ‘unknowns’ about this type of investment to be able to make an informed decision and weigh up the risks against the possible gains so I would urge anyone who is considering Bitcoin as an investment option to take care.
Rob Downes, QFA is a Qualified Financial Advisor.You can contact him through John F. Loughrey Financial Services by telephone on 074-9124002 or by email on firstname.lastname@example.org