A walk on the wild side
Hannah McQueen takes a dip in the volatile waters of Bitcoin purchasing.
My Dad called me for a chat the other day and asked whether he should invest a chunk of his life savings in Bitcoin.
I asked him the standard question – Could he afford to lose it all (knowing he couldn’t)? He replied his friend had done very well out of it and believed it was ‘‘a no brainer’’.
The volatility in the price of Bitcoin, including a 40 per cent surge in a single week at the beginning of this month, has prompted warnings, including from our own Reserve Bank, that it’s beginning to look like a speculative bubble.
But those warnings have been drowned out by stories of people making their fortunes in Bitcoin.
If you bought a single coin this time two years ago, you’d have made a cool $23,459 profit on your $653 investment – that’s a 3,592 per cent gain.
Many of the early adopters have become multi-millionaires. I can see why my Dad’s friend was so enthusiastic.
I tend to subscribe to the same philosophy as Warren Buffet, that is ‘‘never invest in a business you don’t understand’’.
It’s worked quite well for the world’s second richest man, and not understanding did not bode well for New Zealanders who piled into the stock market and lost their shirts 30 years ago in the 1987 stockmarket crash.
Despite that guiding principle, I have just downloaded myself a nice new digital wallet and bought myself a (sliver of) bitcoin.
I did it not do it because I was worried about missing out on those mind-boggling gains. I’m intrigued by digital currencies because I love the idea of the banks being disrupted and that you can trade without someone clipping the ticket.
But the primary reason I did it to understand something that will undoubtedly form a bigger part of the landscape in the future.
I’d already listened to podcast after podcast, I’d read the online reckons of a dozen people attempting to explain it and I even read the white paper written by the founder of Bitcoin, Satoshi Nakamoto.
But I felt as though the only way I would truly get to grips with it, was by doing it. So, I put my hand in my pocket as something of an experiment.
If I was in it to make money I’d already be kicking myself about the gains I missed out on while I quibbled about the price of buying in.
You see, while there’s no central bank to clip the ticket on each transaction, it’s quite expensive to acquire Bitcoin in the first place.
Bitcoin itself charges 2.5 per cent and the exchange I bought through charged another 7.5 per cent.
So, if you were looking at spending $10,000, you’d have to spend $1,000 on transaction fees just for the privilege of owning a currency that’s not actually legal tender anywhere in the world.
That felt pretty steep to me so I delayed my purchase and by the time I’d made peace with the entry price, the price of Bitcoin had surged by about 60 per cent.
It’s since surged even higher, but that volatility is not exciting to me; in fact, it feels a lot like gambling and I don’t have the stomach for it.
Despite the Bitcoin curve showing inexorable gains and predictions of more to come, despite the scarcity of Bitcoins and despite the money my Dad’s friend made, there are good reasons to be cautious.
For a start, Bitcoin has no intrinsic value. Its value is supported by the fact people trust it, and any currency without that will collapse.
It’s also not currently regulated, but it’s already attracting the attention of regulators around the world, so what will that do to its value?
Then there’s the fact that Bitcoin is not the only game in town, it’s just currently the largest. There are more than 1300 other cryptocurrencies, with the frontrunners after Bitcoin including Bitcoin Cash, Ripple and Litecoin.
You also need to factor in the competitors that haven’t emerged yet. Facebook has more than 2-billion active users and is taking over every other sphere of life, what happens if it develops its own? Or Amazon, or Google?
So by all means, download yourself a digital wallet, get verified, try it out. But for goodness sake, don’t bet the house – or your life savings – on Bitcoin.
Hannah McQueen is an accountant, author, financial advisor and budgeting commentator.
''Bitcoin is not the only game in town, it's just currently the largest.''