DISCLAIMER: For those who do not read the full article, it is vital you understand that neither loveMONEY nor the writer are advocating Bitcoin as an investment. We strongly advise you seek financial advice before making any investment decisions.
Bitcoin is nearing a value of $10,000 (£7,300), but it might not be up there for long.
The question of whether Bitcoin is an investment or gamble, a respectable currency or a speculation-fuelled bubble is a hot topic right now.
Every day, sometimes every hour, there’s a new article proclaiming cryptocurrencies to be either a ground-breaking investment opportunity or a perfect example of a bubble being powered by people who don’t understand what they are doing.
Well, this article isn’t going to rave about the possibilities or warn of a bubble.
I simply want to explain why I bought into Bitcoin and why, despite returns so far totalling 400%, I’d be hesitant to recommend it to investors.
That said, if you’re up for a gamble then buckle up because so far Bitcoin has been a pretty exciting ride.
Sorry, what on earth is Bitcoin?
Okay, how long have you got? There’s actually an awful lot to know about Bitcoin and cryptocurrencies more generally and if I try to explain in too much depth then this article will spiral out of all control.
In fact, it’s so complicated and so often misunderstood that I am not going to try and provide more than a very basic explanation here.
So, the short version: Bitcoin is the best known of the new wave of digital currencies. They are not controlled by governments or corporations and they can be traded globally.
Despite the complexities surrounding them, the idea is relatively simple – each coin is a unique line of code that can be verified and is written down on a ledger. That code/coin can then be sold onto someone else, with the new owner’s code noted down on the virtual ledger, also known as a blockchain.
As well as the ownership note on the ledger, owners receive a private key so it can’t be used by anyone else.
The total quantity of Bitcoin is limited and new coins are created by the process of solving mathematical problems. It takes an extraordinary amount of computing power to do so and there are no guarantees of success, so the process is known as ‘mining’
So far, the currency is not being used like a typical currency. Despite a few high-profile ventures it remains pretty much impossible to buy a pizza using Bitcoin.
However, a growing number of places accept it and there are rumours that some key retailers may decide to do so in the future.
Recently, there have been new versions that have forked off the original Bitcoin (see below) in an attempt to make it easier for the currency to be used as, well, currency.
Like an unstable rocket
Bitcoin was only launched in 2009 and since then its progress has been somewhat unpredictable.
While it may be worth more than £7,000 as I write this, that could easily have risen or fallen by hundreds by the time I hit 'publish'.
In 2010, you could have bought one Bitcoin for just 39 US cents.
Earlier this year, MarketWatch published a ‘regret’ chart being shared by Jeroen Blokland, portfolio manager on the Robeco Global Allocation team. It showed that a $1,000 investment in Bitcoin in July 2010 would have been worth $35 million by May this year.
But, as we financial journalists like to point out, past performance does not necessarily indicate future growth.
Despite that, my husband and I decided to take a punt.
Yes, I bought Bitcoin
About four months ago, after discussing it for several months (and so missing out on some significant returns), my husband and I took some money we could spare and spent it on Bitcoin.
I am going to refer to this as an ‘investment’ just to keep things straightforward. However, I do appreciate that a lot of people would prefer the term ‘gamble’.
We decided to make an investment we could afford to lose knowing that if it failed then we might need to curb our holiday spending next year. If it succeeded then perhaps we could have an amazing holiday with some cash leftover.
And yes, I am only human – a small part of me whispered that perhaps we would see a massive return and clear a chunk of our mortgage. But that small part of me is probably my dormant problem-gambler, so it’s best not to listen to it.
The short story is that, since then, our investment’s value has rocketed by about 400%. Yeah, that’s not bad.
How have I made 400%?
In terms of the actual original Bitcoin itself, we’ve ‘only’ seen growth of 263%. However, we very fortuitously bought just before a new cryptocurrency called Bitcoin Cash split away from the original – meaning everyone who owned Bitcoin at the time of the split gained a Bitcoin Cash unit.
And just recently there was another fork, creating Bitcoin Gold. Again, as proud holders of Bitcoin at the time of the split, we automatically had a unit of that too.
Taken altogether, our cryptocurrency investment has now increased in value by around 400%. That can vary, all three currencies move wildly in value day by day. But so far, the trend has been upwards.
Quick note – you may think that Bitcoin is a fancy, technological Ponzi scheme and if that’s your assessment then I understand why.
But don’t be too alarmed by the new currencies forking off the original. It may look like people using maths to make up even more money, but there has been a good reason behind each fork.
Many people expect that one type of coin will eventually come to dominate the digital landscape and Bitcoin Cash and Bitcoin Gold are attempts to find a system that works better.
Having said that…
It’s easy to talk glibly about my 400% return but the truth is that I have not yet cashed out of Bitcoin.
Our investment is still wrapped up in that currency’s crazy movements and until we do sell our stake it’s probably too early to talk about what we’ve ‘made’. If it all crashed tomorrow, we could lose everything, even our initial investment.
So why don’t I recommend it?
We are having so much fun with our Bitcoin investment. It’s genuinely interesting seeing the way it moves and what affects it, and the online community surrounding it can be fascinating to watch.
But we have been very clear with ourselves: it’s not an investment, it’s a gamble. No one really knows what is going to happen with Bitcoin.
Some say it cannot keep growing at the rate it is just now, but then, some people said that in 2012.
Others say that now the hobbyist investors are piling in (hello!) the whole thing is about to go the way of the Dutch tulip mania bubble – and that is not impossible.
Bitcoin, its spinoffs and other cryptocurrencies are not backed up by a central bank so it’s not protected. It’s an asset that is only worth what people are willing to pay for it.
If people lost faith tomorrow then we’d potentially lose our entire pot.
On top of that, it’s risky. There’s the danger of losing your key and so losing the entire value of the wallet, that has happened to a fair few people.
There’s the danger of fraudsters piggybacking off the success of the currency so far and encouraging people to invest but actually stealing their cash or coin (it’s worth researching carefully and only buying through one of the big exchanges).
However, if you’re interested and you understand the risks and you can absolutely afford to lose your money then Bitcoin and other similar currencies are a pretty exciting place to be. I just can’t recommend them as an investment.
What do you think? Tulip bulbs or savvy investment? Would you buy Bitcoin? What about other digital currencies? Have your say using the comments below.