Over the last few weeks we have fielded plenty of enquiries regarding Bitcoin (and other ‘cryptocurrencies’), and I’m sure you’re curious as to whether this is a good investment or not.
I have no doubt that there is a place for cryptocurrencies as an alternative currency, but this doesn’t necessarily mean it’s a good investment.
From my perspective, it does look overvalued and it has no ‘intrinsic value’ which means it has no income return to measure its underlying value. This means buying Bitcoin is purely speculative on its value going up.
From my investment experience, we have to assess risk versus return and whilst there might be short term reward in Bitcoin, I don’t feel its sustainable, which means you might be carrying more risk for no return. You have to ask yourself “is the juice worth the squeeze?”
When it comes to investing, I like to keep things simple and stick to what I know will derive a result over medium to long periods of time. I know that doesn’t sound as sexy as a brand new online currency which all the cool kids are getting into, but I know it works. I know many more people who have got rich slow rather than getting rich quick; if something sounds too good to be true, it probably is.
A few alarm bells that stand out for me:
- Herd mentality and FOMO – People ‘diving in’ because everyone’s doing it hasn’t worked out so well, historically. Whenever there’s hype, people dive in fearing they will miss out and are often too late to the party, paying a premium (without the upside).
- Investment guru Warren Buffett doesn’t get it wrong too often and I agree with his views in this article. As he famously once said “never invest in something you don’t understand”.
- Cryptocurrencies are not regulated by any Government which carries a huge amount of risk and a lack of protection if things blow up. But it’s also hard to predict what would happen if the Government got involved. Would they shut the whole thing down? Would they create their own cryptocurrency which would make Bitcoin more risky and reduce its value? I don’t have a crystal ball to answer these questions but until we know how the Government fits into all of this, there is additional risk that Bitcoiners are absorbing.
In summary, if you want to spend money on Bitcoin, treat it like gambling and not investing. And as I say to any of my clients who like a punt, if you want to play with money, only put in what you’re comfortable losing.