Take extreme care if investing in Bitcoin

Bitcoin is either a revolutionary currency for the 21st century or a massive financial bubble. We don’t yet know which.

john HeadshotsTRY sq John Berry 3 minute read

OPINION: Bitcoin is either a revolutionary currency for the 21st century or a massive financial bubble. We don’t yet know which.

Followers believe Bitcoin is the future, sending its value up three times over 2020. Yet plenty disagree, comparing Bitcoin to crazy investment bubbles like dotcom stocks.

Questions remain whether governments will stifle cryptocurrencies (Bitcoin is only one cryptocurrency, but is the most widely known).

Lawmakers and central banks don’t want their economic control to be undermined. Similarly, many in financial services aren’t excited about cryptocurrencies potentially bypassing traditional banks and established global payment systems.

Last week the Financial Conduct Authority (FCA), a UK regulator, fired a shot banning many financial products linked to cryptocurrencies (but not banning cryptocurrencies themselves). The FCA’s warning is stark – that Bitcoin and similar currencies are ill-suited to the average investor and in fact pose harm.

The regulator warns cryptocurrencies cannot be easily valued, are open to cyber theft, have wild price swings and aren’t well understood. To top it off the FCA said there is a “lack of legitimate investment need for retail consumers to invest in these products”.

So the FCA, a UK government watchdog, is effectively saying cryptocurrencies are a mix of pointless and dangerous for investors. They go so far as to say “investors should be prepared to lose all their money.”

Much of what they say is true.

Bitcoin is hard to fully understand. As a currency, it is not yet very useful for making payments. It can be stolen and is irrecoverable if passwords are lost.

If there are metrics to value Bitcoin, no one can agree on them. Price swings have been outrageous – recently Bitcoin doubled in less than a month but then fell nearly 30 per cent in a day in January.

Many institutional and sophisticated investors have jumped into Bitcoin, seeing it as a hedge for inflation and a weaker US dollar. Normally gold would have this role, but investment bank JP Morgan is among those thinking digital currencies will take over.

If you want to diversify away from traditional ‘flat’ currencies, especially in a zero-interest rate world, you may look for an alternative safe-haven.

Where is best, precious metals like silver and gold, or cryptocurrencies like Bitcoin and Ethereum?

Global bank Citi has referred to cryptocurrency as ‘21st-century gold.’

It is hard to invest in an asset like Bitcoin when some smart people say it is worth $50,000 or even $400,000, while others are adamant it is worth zero.

Right now its price is US$38,000 (NZ$53,000) but it could easily be double this – or half – on the day you read this.

This is why you are much more likely to find gold or gold mining stocks in your KiwiSaver than cryptocurrencies.

If Bitcoin is a currency overtaking US dollar dominance in the same way the US dollar overtook the Pound, then Bitcoin cannot be ignored. Believing this aligns logically with megatrends of technological change and currency debasement, and many millennials get this.

Bitcoin is without question innovative and global. But before jumping in and investing, ponder the FCA’s warning.

Ask yourself, is Bitcoin the next big thing like the wheel, the steam engine, internet or computers? Or is Bitcoin an emperor with no clothes?

Cryptocurrencies are not mainstream and have hallmarks of speculative assets. Great if you tripled your money holding Bitcoin through 2020, but a disaster if you held it in 2017 when it plummeted 80 per cent.

If you are jumping in, dip your toe rather than jump, and tread with extreme care.

John Berry is co-founder of ethical investment manager Pathfinder Asset Management, and ethical KiwiSaver provider CareSaver. Pathfinder’s funds are not invested in Bitcoin.

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