Bitcoin, the cryptocurrency, continues to smash through price barriers, with one Bitcoin this week breaking through the $11,000 mark (then back to $9,000, then who knows what by the time you read this). Some early adopters have made millions and Facebook is now full of adverts to tempt the public to invest their hard-squirrelled cash in it.
So no surprise that my social media feeds, email bag, and even correspondence for my live ITV show last week have overflowed with Bitcoin questions. Here’s a typical example…
@MartinSLewis a friend of mine has told me to invest in Bitcoin.— Jeff Birch (@Jeffbirch66) November 4, 2017
What’s your view on them as I’m not quite sure what they are ?
So while investment isn’t normally my bag, I wanted to bash out a quick blog with four simple Bitcoin thoughts (if nothing else so I can link to it in reply to future questions).
At this point I should say I’ve no expertise on the technology behind Bitcoin or other cryptocurrencies and assets. For a fun beginners’ guide to Bitcoin, there’s this ‘BBC R4 Baddiel tries to understand Bitcoin’ programme or you could always go to Wikipedia (as always treat it with a pinch of salt though).
- Don’t put your money into something you don’t understand. Tweets like the one above is what spurred me into realising I needed to write something. My very simple answer is if you don’t understand Bitcoin you should not be investing in it.
That doesn’t mean you must understand the nitty-gritty of the tech behind it, but you need to understand what you’re getting into – how it works as an investment, how liquid it is (ie, can you get out when you want to), the level of risk and what can drive the price up and down.
So if you’re going to invest, you need to start doing research and reading. The mere fact that a friend has told you it’s a good idea, doesn’t mean it’s right for you.
- The demand for Bitcoin right now is likely from speculators more than users. Bitcoin is a currency and there are now a few places allowing you to spend it. Yet most asking me about it are doing it as an investment for the future, or as a place to store value, not as a convenient way to shop.
The idea is that Bitcoin is the most likely payment platform to work with a predicted, but far from certain, blockchain online technology revolution (which the likes of Ethereum and others are also part of). To be created Bitcoins have to be mined and there are meant to be only a limited possible number to be found.
The fact it’s a scarce resource leads to the assumption that if demand rises so will the price.
Of course this does lead people to ask questions such as…
@MartinSLewis , news item on bbcr5live mentioned value of bitcoin, is it really a thing of value?— Sara (@tigerfish4) November 29, 2017
That’s very difficult to answer – almost philosophical! What is value? Well, food has it, because we can eat it. Yet the primary use of gold, which has been a store of value for centuries, is just for jewellery. Its value comes from its scarcity, uniformity, and the fact many recognise it as a medium of exchange.
And then look at our paper money – it has no intrinsic value, but Government validates it so we recognise it as having such. So does Bitcoin have value? Yes, but only because if people choose to accept it as a form of payment.
PS: The massive rise in the speculation price of Bitcoin could actually make it slower or even less likely to take off as a daily currency. People are far less likely to spend Bitcoin when the price is rocketing – they’ll likely just keep hold of it.
- Bitcoin is a highly speculative investment. Bitcoin was invented in 2009, but hasn’t taken off as more mainstream until the last year or so.
It’s an investment – just like stocks and shares – though it’s currently unregulated (the Govt is looking at regulation to minimise money-laundering, but the whole basis of cryptocurrency means this will be very difficult to do). Or if I want to be more controversial, putting money in it is a form of gambling. That means if it does well, you could make serious amounts – 10, 20, 30 times or more what you put in; or just as possible, if it goes badly wrong, you can lose everything.
Therefore you need to be prepared and think about your attitude to risk before you consider investing.
Its price has risen hugely over the last few years and since the beginning of the year the price has rocketed.
Yet as is always the case – and as the regulator would say if Bitcoin was regulated – past performance is no indication of future performance.
It may be that this spectaculative rise will continue. Which means if you put your money in now you will make a fortune. On the other hand, as we’ve seen often in history – whether it’s the canal mania of the 18th century or the first internet boom – this could just be a be a tulip bubble, and soon to burst.
Graphs like these can be read as “I need to get in there, the price is rocketing” or “It’s overvalued, I’ve missed the boat”. We’ll only know with hindsight – you have to accept the uncertainty – though there is a decent chance this is a bubble.
So while the upward curve looks appealing, remember what counts with any asset (especially if, like this, it doesn’t pay dividends) is the price you buy at, and the price you sell at. Buying then viewing a price rise only makes you rich on paper; deciding when to sell is as important as when to buy.
Bitcoin is now at a point where the mainstream public are becoming much more aware of it – rather than the tech and financial aficionados who were in at the start.
That means we may be at the point where the ‘greater fool theory’ is coming into play. That is when many people are buying, not because they think the valuation is realistic, but because they believe a greater fool than them will be willing to pay even more for it in future. The key then is not to be the final fool.
PS: Don’t you feel sorry for the chap who used Bitcoin to buy beer?
- Don’t fall for Bitcoin seller scams. People often ask me if Bitcoin is a scam. No, it’s not. Yet that doesn’t mean there aren’t a lot of scams involved with Bitcoin. Just like buying shares isn’t a scam, but there are a lot of boiler room share scam cons.
Bitcoin isn’t the easiest thing to invest in – you need to buy it and store it safely – and that opens up room for many dodgy people to try to take advantage.
I would certainly be worried about investing in a company that I’d just spotted because it’s advertising on Facebook – which is rife with scam adverts in many areas – especially if it makes it look like a no-lose option.
If you’re going to buy, do your research and go to what is hopefully a legitimate Bitcoin seller. You could try looking at BittyBot, which compares UK brokers – though please note I have NOT done full due diligence on that site, so it is at your own risk . But it seems reasonable, and is regularly covered in the media.
PS: It’s worth noting, in other areas people invest in, even gold, one route is to buy shares in an exchange-traded fund, which tracks the underlying price. So you don’t physically hold the asset, but you gain or lose based on its price change.
However, it is telling that, of the limited financial market involvement in Bitcoin so far, there aren’t any (that I can see) listed on the UK stock market. The only ones I’ve spotted anywhere worldwide are on the Swedish stock exchange.
So please forgive the fact that I probably haven’t given you the firm “Buy or not?” answer you want. To do that I’d need to be a liar, a con man or a clairvoyant – I’m not (honest guv!).
The information I’ve put above isn’t aimed at providing you with enough information to invest. It’s aimed at telling you whether it’s something you should be considering doing more research on. I hope it has put off anyone who’s seeing this as a place to put their crucial savings – it is far too risky to do that.
Yet even if you’re still interested and understand that it is more akin to a gamble, and you have money you can afford to lose, you’ve still more homework to do.