Is Bitcoin a safe haven from the real world?
THE cryptocurrency Bitcoin is proving to be the great enigma.
There is nothing supporting it – not gold, not governments, its value fluctuates wildly, and the financial establishment hates it.
It has been compared to the South Sea Bubble and is loved by criminals and fraudsters. Yet fortunes are being made out of it.
Earlier this year one Bitcoin was worth $40,000 (more than £29,000). A decade ago, you could buy it for 7p.
And arguably it is slowly inching towards some sort of semi-respectability.
Asset manager Ruffer has embraced it within its investment portfolios, online payment system PayPal recently opened its doors to cryptocurrency trading, a number of retailers including soap shop Lush, online game outfit Twitch and select
Brewdog pubs and Starbucks coffee shops accept Bitcoin as payment, while financial consultants deVere have described it as “the future of money”.
On the other side of the fence, regulator the Financial Conduct Authority has warned consumers who dabble “they should be prepared to lose all their money” while JP Morgan chief executive Jamie Dimon famously threatened to fire any staff member who traded it. So, what is Bitcoin?
ThisisMoney explains: “Most investors have little idea what a Bitcoin is – and mystery surrounds what makes it valuable. In simple terms, Bitcoin is a computer file stored in a ‘virtual wallet’. It can either be saved or traded for goods and services from businesses that accept the technology.
“It is called a cryptocurrency because the computer programme used to make Bitcoin employs cryptography – or secret codes. This provides a layer of security to stop hackers stealing it.
“A record of all Bitcoin is kept within a ‘blockchain’. This is a database containing details of all transactions that have taken place and it provides a marketplace where buyers and sellers can trade their Bitcoin.”
The number of Bitcoins in circulation will never exceed 21 million due to the way computer software used to create the currency has been engineered.
Enthusiasts maintain that is one reason why its appeal will hold up.
Nigel Green, chief executive of deVere, told the website: “We believe this cryptocurrency is the future of money. The staggering pace of the digitalisation of our lives, with increased use of computers and online trading, means digital money is here to stay.
“When facing times of trouble – such as those we are in right now – central banks are forced to print more money to support their economies. This depresses the value of traditional currencies. But Bitcoin is a safe haven asset that is not devalued. As a borderless currency it suits the modern world.”
Sceptic, Ryan Hughes, of wealth manager AJ Bell, countered: “The old investment adage about never investing in something you do not fully understand has been thrown out of the window with this cryptocurrency. People have simply not wanted to be left behind.
“A major problem is that there is no way of giving Bitcoin an accurate valuation. This is a classic feature of an investment bubble.”
Since January 10, all UK cryptoasset firms must be registered with the FCA under regulations to tackle money laundering. Operating without a registration is a criminal offence.
The FCA stated: “Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks. If consumers invest in these types of product, they should be prepared to lose all their money.
“Consumers are unlikely to have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme if something goes wrong.”
It added: “There is no guarantee that cryptoassets can be converted back into cash.”
You have been warned!
Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,
based in Solihull. Email: tlaw@eastcotewealth.co.uk The views expressed in this article should not be construed as financial advice