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Caution! This is why I think Bitcoin is an unsafe investment

I’m sceptical about cryptocurrencies. I’m someone who invests for the long term, so is it any surprise?

Many people still shout about the merits of Bitcoin and how it will one day be a major worldwide currency. I just don’t see it.

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It’s true that some people have made small fortunes by investing in Bitcoin. But I follow Warren Buffett’s first rule of investing, which is to never lose money, so I would rather stick to something where I understand the potential pitfalls.

To me, the risks of investing in Bitcoin far outweigh any potential rewards. Here are several reasons why I am continuing to steer away from Bitcoin.

Unpredictable

When I’m investing, I like to pore over a balance sheet and ask myself questions: is the company lumbered with high levels of debt? Can the current levels of cash flow sustain the business? Is the product or service moated against the competition in the market?

As far as I can tell, Bitcoin has none of that. It’s intangible by nature, leaving investors to purely speculate about its future price.

Its wild price fluctuations is a major concern of mine. In the last six months, Bitcoin’s value has slumped by 23%. However, over the past month, it has increased by 14%. How, then, can an investor ascertain its true value?

Although buying stocks and shares sounds complicated, building a portfolio of index funds can be quite straightforward and has the added benefit of attracting low fees. Although, of course, it’s important to understand the fundamentals of the investments you’re making.

Supply and demand

Here is where Bitcoin fans tell me that it’s a finite commodity, like gold. The value depends on the supply-and-demand. When the amount of available Bitcoin is low, but demand runs high, the value surges.

But I think the fans are wrong, to a point.

I think Bitcoin’s availability could be one of its downfalls in the future. As my fellow Fool Peter Stephens has pointed out, its limited size, potential regulatory changes, and limited infrastructure may hamper its ambitions of being a mainstream currency. And if it does fail to become a genuine alternative currency, demand for it may drop.

Regular income

The other perk of owning stocks is the regular income they can generate, in the form of dividend yields. Some stocks on the FTSE 100 have a prospective dividend yield of over 5%, returning a regular chunk to investors throughout the year.

This especially benefits investors with a longer horizon, who can compound their investment by purchasing more stocks with the dividends they receive. It plays into the hands of those looking to build up a passive income stream from investing.

For these reasons, I can’t see myself investing in cryptocurrencies. They might be a sound investment for some people, but for me, the reward is too far outweighed to the risk.

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T Sligo has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.