Bit of a calculated risk
BITCOIN is back. Whatever you think of the crypto-currency, it is increasingly hard to ignore, as its price is breaking new highs by the day.
The latest surge will surprise those who assumed that after the initial hype, Bitcoin would slowly fade and die.
Instead, it has risen more than fivefold in the past year, from just over $7,300 to more than $41,000 (£30,147) at time of writing. By the time you read this, it could be racing towards the $45,000 mark.
Or it might have crashed below $20,000. That is the thing with Bitcoin, you just do not know.
This volatility is what makes it so risky. Most ordinary savers should shun Bitcoin despite the outsize rewards, because the risks are equally huge.
COINING IT
Don’t feel ignorant if you cannot understand Bitcoin, because this is a bizarre new concept: it is a purely digital currency created by programmers and it does not have any physical form.
While traditional currencies are issued by central banks, there is no regulatory authority or nation state standing behind it. So investors have no comeback if the price crashes or their virtual coins are lost or stolen.
Bitcoin has crashed regularly. In December 2017, it raced past $20,000. It then plunged to around $3,000 over the
following year. This could easily happen again, but its growing army of advocates claim it has now established itself and is going mainstream.
Simon Peters, analyst at multi-asset investment platform etoro, said last year’s “meteoric rise” was partly down to the fact that respected institutions are now buying into Bitcoin.
Fund manager Fidelity is an investor, payment service Paypal is allowing its
346 million users to buy and spend Bitcoin, while sceptics such as US bank JP Morgan, whose chief executive Jamie Dimon called it a “fraud” in 2017, have turned bullish.
Last November, Citibank projected the price could hit an incredible $318,000 by the end of this year.
Now private investors are piling in, driving the price higher. However, Peters cautioned: “I wouldn’t completely rule out another price drop.”
Many buy Bitcoin as an inflation hedge, as central banks use quantitative easing or money printing to keep economies afloat during the pandemic, devaluing traditional currencies.
By contrast, the number of Bitcoins can never exceed 21 million and an estimated five million have been lost for good.
Think Markets analyst Fawad
Razaqzada said it is easy to see why people are calling Bitcoin the gold of the future, or “millennials’ gold”.
He said: “Its supply is fixed and there is growing demand for it, which is a pretty good definition of something precious.”
Razaqzada is bullish but also warned: “In the short term, the potential for profit-taking could result in a sharp correction.”
KEEP COOL
Tim Bennett, head of education at Killik & Co, warned against piling into Bitcoin today simply because you regret failing to buy it earlier, when it was much cheaper.
He said: “The only sensible question an investor can ask themselves is this: ‘Should I invest now?’”
Adrian Lowcock, Willis Owen head of personal investing, said future movements are impossible to second-guess: “This is a relatively new asset, highly volatile, and still to find its place in the market.”
You should only invest money in Bitcoin that you are happy to lose.
On that basis, most people should turn their back on it. Sometimes ignorance is bliss.