- U.K. Broker Hargreaves Lansdown to Offer Bitcoin Investment to its Customers
- Do I understand it?
- Wealth 50 fund
- Am I comfortable with the ups and the downs?
- Hyperwave - Let's Talk About GBTC ! (The Bitcoin Investment Trust)
- A bold opportunity in the era of digital gold
- So first why even con
- Is there a way to invest that works for me?
- Britain's largest broker offers bitcoin investment
- Where does that leave bitcoin?
U.K. Broker Hargreaves Lansdown to Offer Bitcoin Investment to its Customers
- We believe investors should only invest in things that they understand
- Bitcoin is a speculative bet rather than a conventional investment
- Many bitcoin investments have limited track records and are complicated in their own right
Bitcoin is a digital cryptocurrency based on blockchain technology, where new units are generated by solving complex mathematical problems.
Unlike a conventional currency, it’s not issued or controlled by a central bank.
It has made headlines this year as the price surged from just under $1,000 per coin to over $15,000. That run has raised its profile with investors.
However, we feel there are some important questions investors should ask themselves when buying cryptocurrencies.
Do I understand it?
We always say investors should only invest in things that they understand.
That is as true of bitcoin as shares or funds.
Without an understanding of your investments and what is driving performance, investors stand little chance of making informed decisions.
Wealth 50 fund
This is particularly true of cryptocurrencies. They are highly complex animals and require a fairly detailed understanding of coding to get your head around properly.
Adding to the complexity is the fact the rules of the game can change. Although all users must use the same software for bitcoin to function, with no central authority overseeing potential changes there’s no-one to ensure these changes are in the interests of ordinary bitcoin holders.
Ultimately though it’s demand driving the price at the moment.
It seems likely that much of that demand is from people hoping to benefit from future price rises rather than use bitcoin as a means of exchange.
In that regard it bears some resemblance to speculative bubbles we’ve seen in the past – most famously tulipomania in the 17th century, when a single tulip bulb changed hands for the equivalent of 10 years’ wages.
Predicting the point at which demand subsides and prices begin to fall is very difficult, if not impossible, making buy and sell decisions equally challenging.
Am I comfortable with the ups and the downs?
It’s easy to look at the bitcoin graph and see the ups.
Hyperwave - Let's Talk About GBTC ! (The Bitcoin Investment Trust)
But don’t lose sight of the downs.
The recent price increase means it’s barely a blip on the chart now, but between 25 November 2013 and 7 April 2014 the price of bitcoin more than halved from $979 to $422.
A bold opportunity in the era of digital gold
It didn’t return to its 2013 high until the beginning of this year. Bitcoin is certainly not a one way bet.
Bitcoin has also been very volatile. Daily swings of 10% or more, up and down, are not uncommon.
It’s worth asking yourself how you would feel if you were to lose 20% or even 50% of your money in a matter of days, because this is perfectly possible.
These price swings happen because there’s no widely accepted way to value bitcoin.
Unlike shares, bonds or cash accounts, bitcoin doesn’t pay dividends or interest.
So first why even con
With no underlying ‘value’, price is driven only by the interaction of supply and demand. From a purely theoretical point of view, a price tag of $2 makes as much sense as $200,000.
That makes bitcoin a speculative bet rather than an investment in the conventional sense. It’s important not to confuse the two.
Is there a way to invest that works for me?
There are several different ways to invest in bitcoin.
However, it’s important to be aware of the risks associated with each.
The most obvious way to invest is to buy the currency directly. However, that makes individual investors responsible for the security of their bitcoin – since the key is stored on your computer.
There have been many examples of hackers stealing keys from bitcoin exchanges and miners.
With the increasing value of bitcoin, individual investors are becoming more attractive targets, especially as they lack the sophisticated internet security of large companies.
Another option is to invest indirectly through products that track the price of bitcoin – exchange traded funds (ETFs), exchange traded notes (ETNs) or investment trusts.
However, these products are complicated and carry risks of their own.
Bitcoin investment trusts have become popular.
But as ‘closed-ended’ funds with a fixed number of shares, they’re not ideally suited to tracking prices.
The share price of an investment trust is dependent on the demand for the shares.
If demand spikes, the price of the investment trust can be higher than the value of the underlying bitcoin, while a surge in sales could see the price fall below.
One alternative is to invest through an ETF or ETN.
Many providers are relatively new names, specialising in cryptocurrency. They haven’t weathered a full market cycle in the past and have short track records.
Make sure you know how the fund gets access to bitcoin.
Britain's largest broker offers bitcoin investment
It could buy bitcoin directly or instead buy derivatives. As importantly, check whether the bitcoin is ring-fenced for investors, or if lenders would come first in the event that the fund manager runs into trouble.
Investors should also bear in mind that if lots of people were to pull out of the fund at the same time, the fund might have difficulty selling its bitcoin at a reasonable price.
To make matters more confusing, some ETFs or ETNs are denominated in currencies other than dollars (against which bitcoin is usually benchmarked).
That leaves investors exposed to movements in currency markets as well as bitcoin prices, and means you get a different return from what you might expect.
Where does that leave bitcoin?
Given the difficulty of valuing bitcoin, it’s almost impossible to make a call on the current price or its future direction.
However, cryptocurrencies in general are clearly subject to their own risks, over and above those of more mainstream investments.
It’s important investors are aware of them.
As with any highly speculative investment, if you do decide to invest we would suggest that cryptocurrency shouldn’t make up more than a small proportion of your total portfolio. The risk of the price falling substantially also means investors should only invest money that they can afford to lose.
If you are ever unsure of the suitability of an investment you should seek advice.