Read time: 3 mins Financial News

To B or not to B? The Low-down on Cryptocurrencies

  • The value of bitcoin has skyrocketed, tempting many to invest
  • But what exactly is bitcoin?
  • Is it a sensible long-term investment?

Bitcoin has been at the centre of a media storm in recent months, but could the seemingly stellar rise of this little-understood cryptocurrency be too good to be true?

The value of a bitcoin exploded during 2017, leaping from £732 in January to £14,759 at its peak in December, though at the time of writing in early 2018 it has fallen back to £10,030.

Many investors have apparently made fantastic profits, and their stories inspired a kind of 21st century gold rush as others raced to jump on the bandwagon.

But, with all the excitement around bitcoin, people seem to be overlooking a key rule of investing - don’t invest in anything that you don’t understand.

Bitcoin still remains something of an unknown for most people.

It’s not widely known who invented it and, unlike traditional forms of currency, it isn’t issued like a central bank, like the Bank of England issues pounds.

picture of a robot pointing at a chalkboard

Chomping at the bit?

So, what exactly is bitcoin?

Bitcoins don’t exist in the physical world, but are stored on a computer in a “digital wallet” - a sort of virtual bank account that allows you to send and receive bitcoins.

A growing number of retailers now accept bitcoin as payment, from big brands like Microsoft and Expedia to some holiday booking websites, charities, dentists and even fish and chip shops!

That said, most people who own bitcoin keep it as an investment, not to spend.

Theoretically, anyone can create bitcoins by using special software to solve maths problems, earning a certain number of bitcoins as a reward - a process known as ‘mining’.

But mining is very complicated and requires high-powered computers, so in reality, most people buy their bitcoins through an online exchange, just like they would buy stocks or shares.

It has shot up in value as it has become more popular with mainstream investors, particularly in China and the Far East, which has helped to fuel a great deal of hype, further stoking demand and pushing the price up even faster.

But history shows us that, throughout its short life, the value of Bitcoin has been prone to similar surges in value, followed by big crashes.

In 2011, for example, Bitcoin leapt from about 20p to £24, before sinking back to around £1.50.

And in 2013 Bitcoin topped £920, but by 2014 it had slumped to around £445.

illustration of a road with a warning sign

Risky business?

So, we can see that, while Bitcoin has gone through periods of rapid price growth, is also a particularly volatile asset that has been prone to big drops in its value, which would indicate it’s more suited to a high-risk investor.

Here at evestor, we believe in spreading your risk. We do that by combining high, medium and low risk assets in a highly diversified portfolio.

We work with three of the five biggest asset management companies in the world - Vanguard, Fidelity and Blackrock - which manage assets worth more than US $10 trillion, investing in more than 2,500 different companies in 75 different countries.

They include some of the world’s most recognised brands, like Microsoft, Amazon, Disney and Sony.

And while cryptocurrency might be the latest hot trend, it’s long-term future is far from certain.

In Bitcoin’s wake, a raft of alternative cryptocurrencies have launched, such as Ether and Cryptos, prompting concerns of a bubble, like that seen in the UK housing market before the crash of 2008.

These currencies are hard to put a value on, and it seems likely that, as technology evolves, more sophisticated cryptocurrencies will emerge.

At evestor, we always say that it is never too soon to start investing, but at the moment, making a long-term investment in cryptocurrency seems highly speculative.

Instead, why not start your investment journey by signing up for a free consultation with one of our financial advisers?

They can help you better understand your appetite for risk, recommending a diverse range of suitable investments and setting you on course for a secure financial future.