In the last few years, cryptocurrency has arguably become one of the hottest investments products, with Bitcoin in particular leading the crypto investment craze. While the final decision is ultimately yours, here are three major reasons to be wary of investing in Bitcoin.
1. The price of Bitcoin is extremely volatile
One of the biggest reasons to be wary of investing in Bitcoin is that its price is extremely volatile in comparison to assets in other financial markets. The price of Bitcoin can rise and fall significantly in short periods of time.
Indeed, swings of 10% or more either way in a day are not uncommon, making Bitcoin an extremely risky investment.
For a cautionary tale, you need look no further than early 2018. A lot of new investors entered the market in January 2018. This was after the price of Bitcoin hit an all-time high of nearly $20,000 (£15,000) in late December 2017.
However, following a persistent parade of bad news including exchange hacks, scams and disquieting rumours, the price of Bitcoin declined steadily from the beginning of the year, dropping all the way down to less than $6,000 (£4,500) by the end of July.
New investors who entered the market when the price of Bitcoin was high lost a lot of money in a short period of time.
So, if you are cautious investor, Bitcoin may not be the investment for you. With the potential for big gains in this investment comes an inherently bigger risk.
2. Bitcoin is not regulated or insured
Bitcoin is not regulated by any entity or government, meaning that there is no one insuring your money. This is a major reason to be wary of investing in Bitcoin.
Unlike the UK’s banking system, which is regulated by the Bank of England, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), there is no one to protect and insure you if your friendly Bitcoin exchange goes under with your personal Bitcoin in tow.
You cannot appeal to the Financial Ombudsman Service or even the Financial Services Compensation Scheme (FSCS) for any help or bailout. Similarly, should someone hack into your Bitcoin wallet, there is very little you can do to follow up.
An excellent example of how easy it is to lose your Bitcoin investment and never get it back is the hack of a Tokyo-based Bitcoin exchange called Mt. Gox. In its heyday, Mt. Gox was the world’s biggest exchange for cryptocurrency.
In February 2014, the exchange filed for bankruptcy after reporting that it had lost about 750,000 Bitcoins belonging to its customers (along with 100,000 of its own Bitcoins) due to a hack of its systems. The total value of these Bitcoins at the time was around $480 million (£300 million).
The incident highlights the risk of investing in Bitcoin.
3. Bitcoin has no store of value
Many investment assets have something referred to as a store of value. This means that there is some sort of inherent value in them that people want.
An example is gold, which for centuries has been sought after and traded due to this value component. If the world’s currencies, for example, suddenly disappeared, people could still trade gold for commodities.
Bitcoin, however, does not have this inherent store of value on its own. Any Bitcoin you hold only maintains value as long as the market says it does.
If you invest in Bitcoin and the market decides it does want to pay for them, the Bitcoin becomes worthless.
Additionally, Bitcoin does not have the backing of any government currency or any physical commodity. Indeed there is generally a lack of clarity on whether Bitcoin is a currency or a commodity.
This fact, that it is only backed by sheer demand and not by any tangible asset or government currency, is a big reason to be wary of investing in Bitcoin.
There are some significant reasons to be wary of investing in Bitcoin. Before you invest, it’s a good idea to understand and determine whether you can bear the risks involved.
If you conclude that Bitcoin is too risky, it might be wiser to explore other ways of investing your money. It could be better to put you money into a savings account that will earn you interest over time.
Alternatively, you might prefer to invest in publicly listed companies via a brokerage – after all, The Motley Fool is a huge advocate of stock-picking!
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