By Phil Smeaton, Chief Investment Officer
In our recently published report, ‘The Generation Game’, we made an interesting discovery. Our research found that 11% of under-45s said investing in cryptocurrency had contributed to their current wealth, compared with just 4% of over-55s. As the price of perhaps the world’s most well-known cryptocurrency – Bitcoin - continues to plummet from its December 2017 highs, we ask if investing in this relatively new concept is the future, or for the fool-hardy?
One of the first Bitcoin millionaires was an American teenager. He desperately didn’t want to go to college and made a deal with his parents that if he was a millionaire by the time he was 18 years old, he wouldn’t have to go. Having invested in his first Bitcoin in 2011, Erik Finman won the deal. But not everyone has a Bitcoin success story. By the end of last year, the price of a Bitcoin had rocketed to over £14,000. Today it’s worth just over £4,790 . So, for investors who joined the frenzy late last year, they may well be feeling a little disenfranchised.
The risk of investing in Bitcoin
When we invest on behalf of our clients, we look for assets that have strong underlying fundamentals, meaning that whatever comes along in the short-term shouldn’t get in the way of its ability to perform over the medium to long-term. But Bitcoin suffers from extreme short-term volatility, as well as an opaque future. There’s just too much uncertainty to make it anything other than speculative.
The other thing to consider (whether you’re investing directly, or through a fund), is that there’s a finite amount of Bitcoin that can ever exist – only 21 million can be created during its lifecycle, and the availability of freshly minted Bitcoin halves every four years. So, the reward for mining Bitcoin reduces as time goes on - initially it was 50 Bitcoin, and it is now down to 12.5. This will continue to halve for around 100 years, when all 21 million have been issued. Like gold, this could mean it increases in value over time. Or it might just be replaced by something newer, faster and better, losing its value altogether.
Is there a future for Bitcoin?
In our view, there are certain things that need to happen before this sector can be considered a feasible investment strategy:
Bitcoin is not truly a currency, at least not yet, and is best thought of as a commodity. Only time will tell if can deliver on its promise to displace central banks and hard cash as the primary means of exchange in the future. Until Central Banks and governments release their own versions and make them legal tender, or they fully endorse a cryptocurrency like Bitcoin, then this is unlikely to happen.
It currently takes an hour to transact in Bitcoin. This transaction processing speed needs to speed up.
Price volatility needs to stabilise.
History suggests that when something looks too good to be true, it usually is. Take the dot-com bubble as a prime example. We stand by our belief that Bitcoin and other cryptocurrencies are highly unlikely to live up to their “get rich quick” promise. It’s not a recommended investment strategy for anyone who can’t afford to lose all their money or wait a very long time to get a meaningful return. They remain purely speculative, and the so-called Bitcoin millionaires are like the original dot-com millionaires – a rare breed.
For those who are considering investing in cryptocurrencies or are already invested and wondering where to go next, we recommend seeking advice from a financial planner. There are likely to be better options out there that can offer a more considered opportunity.