Investing In Cryptocurrencies
Hailed by fans as a market-disrupting liberation, and demonised by critics as a dangerous, volatile creation, bitcoin and other cryptocurrencies are never out of the headlines for long. On December 16, 2020, the price of bitcoin hit $20,000 for the first time. On January 3, 2021, its value soared above $34,000, meaning the cryptocurrency had gained almost $5,000 in the first few days of 2021. Then on February 9, 2021, its value briefly hit a new record high of $48,000 after electric-car maker Tesla revealed that it had bought $1.5bn of the cryptocurrency and pledged to start accepting it as payment for vehicles.
On Sunday, February 21, the coin rallied to a new record high, peaking at $58,354 before falling dramatically two days later as low as $44,845.72, a loss of 18.4% for the day and a decline of almost a quarter from Sunday. At the time of writing [March 2], the coin had swung back up to $48,739.20
Experts believe recent jumps in the price has been due to a wave of money from both institutional and private investors, spurred on by the coronavirus pandemic.
There’s a certain amount of mystery around bitcoin and other cryptocurrencies. Satoshi Nakamoto is the pseudonym used by the presumed person or people who developed bitcoin, created and deployed bitcoin’s original implementation software and conceived the first blockchain database.
The Three Biggest Cryptocurrencies
Bitcoin, the best-known and first major cryptocurrency, launched in 2009 and remains the market leader. Its market capitalisation — effectively its total worth — is $910bn, as at March 2. Ethereum and Cardano come in second and third, with respective market caps of $179bn and $39bn, as at March 2.
Since 2009, a wide range of challenger cryptocurrencies, dubbed altcoins, have arrived on the scene.
How Bitcoin Price Has Performed
The bitcoin price has climbed steadily since September 2020, fuelled by demand from investors and also news that PayPal will allow US customers to buy and sell the cryptocurrency within its app next year and Tesla pledging to start accepting it as payment for its vehicles. One bitcoin currently costs $48,739.20, as at March 2.
However, the cryptocurrency has made steady gains before, such as at the end of 2017 – before collapsing in 2018 (see graph below, which was produced in January 2020).
Extreme volatility is perhaps the most defining factor of the cryptocurrency market. To put bitcoin prices into investment profit and loss terminology, if you had invested at the start of 2020, you would be sitting on a 300% profit by the end of the year. However, if you’d invested at the start of 2018 and sold at the end of the year on New Year’s Eve, you would have lost 73% of your money as the bitcoin price collapsed.
If you wonder what market forces drive these prices up and down so wildly, you are not alone. While generally speaking the value of these currencies is, like anything else, linked to supply and demand plus the number of competitors, it is often difficult to determine what exact factors influence this erratic performance. This makes digital currency all the more high risk an asset to invest in!
Risk Of investing in cryptocurrencies
If you want to invest in crypto, ponder first whether you would buy a house in Rapid City, South Dakota. This city in the United States has just over 75,000 inhabitants and is reportedly one of the places with the most unpredictable weather on earth, where snow blizzards and summery thunderstorms occur without warning, before everything calms down again and temperatures rise dramatically the very next day. The weather of Rapid City is an apt metaphor to describe the behaviour of bitcoin & co: it can be totally bonkers.
If you do invest, be prepared to lose some or all of your money. Crypto is not conventional investing.
In 2018, MPs called cryptocurrencies a “Wild West industry”. They are also not regulated by the UK watchdog, adding another layer of risk. From January 6, 2021, the Financial Conduct Authority will ban the sale of complex derivatives that speculate on cryptocurrency movements: financial services will be prohibited from offering retail customers contracts for difference, spreadbet options, futures and exchange traded notes that focus on digital currencies.
Bank of England governor Andrew Bailey recently said he was “very nervous” about people using bitcoin for payments. He has previously warned that cryptocurrency investors should be prepared to “lose all their money”.
How Good Is Bitcoin Investment?
Bitcoin is at the (very) “high-risk” end of the investment spectrum. The price of cryptocurrencies is volatile; some can go bust, others could be scams, and occasionally one may increase in value and produce a return for investors.
As with any investment, do your due diligence and don’t pin all your hopes on one company or one cryptocurrency: spread your money around so you spread the risk and only invest what you can afford to lose.