It was just over a month ago that a post popped up in my facebook account. A guy I know had, seemingly overnight, become an expert in trading cryptocurrency. Updates are posted daily, and many of his followers were quick to post comments boasting about how rich they were all going to become, and how everyone else was crazy for not getting in on the action.
Bitcoin and other Cryptocurrencies have become the biggest bubble the world had ever seen. Gains achieved in less than one year had surpassed the likes of the Tulip Mania of 1630’s and the Tech bubble of 2002.
It was hard not to get caught up in the excitement, or at least feel the pang of regret in not taking the plunge.
The chart below shows the growth of Bitcoin to mid December 2017, relative to the other major events throughout history.
Fast forward a month and the returns have been nothing short of spectacular. And by spectacular, I mean that you would have lost a spectacular amount of money had you started investing in Bitcoin a month ago!
While the price of Bitcoins have skyrocketed from less than $1,000 USD to over $19,000 over the course of 2017, since December 15 2017, it’s price has plummeted from $19,000 to under $11,000 USD today. That equates to a loss of over 42% (which is roughly the same as what the entire share market lost during the Global Financial Crisis).
The returns achieved by the various Cryptocurrencies over the past month provides an amazing insight into how volatile the prices of these assets can really be. Following recent talk of South Korea banning the trade of Cryptocurrencies, at the time of writing, some currencies are down over 40% in the last 7 days, while many are also up by over 10% in the last hour!
With such significant swings in price in just a matter of days, investing in Crypto seems to be the world’s newest and most exciting Casino!
What is Cryptocurrency?
Cryptocurrencies, such as Bitcoin, Ethereum and Ripple, are a form of computer code, essentially entries in a database that no-one can change without fulfilling specific conditions. They use cryptography, which is the process of converting legible information into almost uncrackable code, to track purchases and sales. The ‘coins’ are stored in a digital wallet with transactions recorded on a public ledger called ‘blockchain’.
Cryptocurrencies started to emerge over the last decade, when the global financial crisis caused many to question the legitimacy of our banking system and governments. Unlike traditional money, with Cryptocurrency, no notes or coins are involved. No central bank issues the currency, and there no regulator or nation state stands behind it.
Is it the end of currency as we know it?
While there are many people who are quick to dismiss the idea of cryptocurrency as a passing fad, remember that similar conclusions were made about the internet when it was only in its infancy.
With more and more people shopping and transacting in an online world, it seems only natural that we will seek out a form of payment that is more efficient and has lower transaction fees than what is currently on offer. While we are certainly not there yet, there will eventually be a shift in currency as we know it today, and as cryptocurrency matures it may very become a more common part of our lives.
Is it a good investment?
The most common forms of investment are stocks, bonds and property. As they have been around for a while (like, a few hundred years), when you buy any of these assets you can be reasonably confident that there will some form of return on your investment. With stocks, you will receive regular dividend payments and capital growth, with bonds there are regular interest payments, as well as rent on your investment property.
Currency, like the notes and coins in our wallet (and the Thai Baht we have leftover in the drawer from our last holiday) is simply a mechanism that is used to pay for goods and services. When you hold currency, you do not expect to receive an investment return; it is simply the thing you use to buy the things you want.
Like traditional currency, Bitcoin was originally intended as a way to pay for goods and services (just without any form of government regulation). Bitcoins are not a business, they do employ any resources and they do not create output of any kind.
As there is no guarantee of interest or capital growth, when you buy a Bitcoin, all you get is a virtual coin and the feeling of hope that you might be able to sell it to someone else down the track for more than you bought it for. And that’s what the fuss is all about – millions of people worldwide hoping to sell their virtual coins to someone else for more than what they paid.
As for it being a reliable long term investment? Well, as the currency matures over time and becomes more commonplace in our world, it’s likely that its true value will revert towards that of any other currency. This might not be great for future returns. However, in the short term, it could be exciting way to hopefully make a quick buck; however, only if you can buy it and then sell it at the right time.
I wish you the best of luck.
I hope you enjoyed my article, if you are interested in finding out more please visit the links below.
Banking on Bitcoin is a great documentary that covers Bitcoin’s roots, its future and the technology that makes it tick.
Blockchain is a revolutionary technology that is set to change the way we store records and transactions. This article provides an great analysis of the technology and explains how it works in simple terms.
Did you know that, as well as buying Bitcoins, you can also mine them? Well that is, only if you have a tonne of computers and access to massive amounts of cheap electricity. This article provides information on the shocking amount of power that is required to power this new technology, and how it could have a significant environmental impact.
While cryptocurrency cannot be valued, the Blockchain technology that underpins Bitcoin is a real commodity that we are likely to see a lot more of in the future. An interesting analysis on valuing Bitcoins and Blockchain technology from the 'Dean of Valuation' at New York University can be found here.
Disclaimer: All strategies and information provided in this article are general advice only; this advice may not be suitable to you because it does not take into consideration any of your personal circumstances