Should you invest in bitcoin?

Digital currencies might be making all the headlines right now, but should you invest your money in them?
Regulators around the world are cracking down on cryptocurrencies and some crypto exchanges. But that hasn’t put off the big technology companies like Amazon.
What is bitcoin and how does it work?
The concept of digital money that you use online is not that complicated in itself. After all, most of us will be familiar with transferring money from one online bank account to another.
Bitcoin is a digital asset that operates like normal currency with notable differences. Cryptocurrencies are peer to peer payment methods, without the banks taking a cut with every transaction. There are no physical version of the coins either.
Each bitcoin is created (or mined) using an encrypted code, which is a string of numbers and letters. The same equation used to create the code is can “unlock” it (like a virtual key).
Other important points about bitcoin:
Cryptocurrencies, like bitcoin, are a form of payment that uses blockchain technology to send data in cyberspace
Each bitcoin must be mined
It is finite: only 21 million bitcoins that can be mined in total
Cryptocurrencies are “decentralised” meaning they are not regulated by a financial authority, like a government or central banks
Most platforms will allow bitcoin purchases using credit cards
Should I invest in bitcoin?
Bitcoin is extremely volatile, but if you are willing to take the risk, first make sure you understand what you are investing in and have a crypto investment strategy.
Also make sure you aren’t investing simply because you have a fear of missing out. There are a number of questions you should ask yourself before getting involved:
Do I understand what I am investing in and how bitcoin works?
Am I happy with the level of risk?
How much more expensive is it now compared to a few months ago? If so, why am I wanting to buy a thing because its price is higher? Where else in my life do I do that?
Is there any evidence to suggest prices could rise even higher?
If I buy it now with a view to sell it for even more later, who do I think will buy it from me for that higher price and why?
If an asset is so great, why was I not interested when it was much cheaper?
Have I convinced myself that I am in some way “in the know?”
If you don’t have answers to these questions, it’s probably not a good idea to invest. If you do buy bitcoin, make sure you aren’t putting money you need on the line.
Things to consider before investing in bitcoin
Like any investment, cryptocurrency comes with risks and potential rewards. Compared to traditional types of investments, cryptocurrency is particularly risky.
Here are some things to think about before you invest:
We don’t recommend investing all your life savings on cryptocurrency
It’s best to see it a bit like gambling so only invest small amount of your disposable income
Never invest more than you can afford to lose – think about the long term
If you haven’t got much money left at the end of each month, it’s best to steer clear of crypto and focus on saving your money instead
Weigh up the pros and cons first:
Pro: Cryptocurrencies are global, meaning they have the same value in every country and no exchange rates.
Con: Cryptocurrencies are extremely volatile and very risky investment. People have also reported having to wait to get their cash out because of technical snarl-ups.
Can you lose all your money in bitcoin?
Yes you certainly can.
There are three main ways to lose all you money with bitcoin:
The value plummets and you sell: crypto is volatile with its price determined by sentiment. Though technically you only lose money if you sell an investment for less than you bought it for. This is known as “crystallising your losses”.
Your memory: experts estimate 20 per cent of all cryptocurrency has either been forgotten about or lost with a current value of around $140billion, according to Crypto data firm Chainalysis
Cyber crime: hackers and scammers are thought to steal around $10million worth of cryptocurrency every day, according to Atlas VPN
Some people choose to take their holdings offline and store it in a physical device called a cold wallet, otherwise known as a hardware wallet or cold storage – similar to a USB stick. While this protects from online attacks you risk losing your holdings.
The ups and downs of bitcoin
Its hailed by fans as a market-disrupting liberation and demonised by many personal finance experts as a dangerous creation. One things for sure is that bitcoin is volatile.
Since December 2020, bitcoin has enjoyed a theatre of dramatic ups and downs. We outline some of these here: is a bitcoin crash coming?
The problem is that the price of cryptocurrencies is not underpinned by any intrinsic value. It is determined by one thing: confidence, says Mark Northway, investment manager at Sparrows Capital.
So if you decide to invest, be prepared for a bumpy ride.
Is bitcoin a good investment for the future?
There could be more price appreciation in 2021.
Fiona Cincotta, senior markets analyst at City Index, thinks the price could rise to about $80,000 this year, but notes that forecasts are notoriously tricky because bitcoin is so hard to value.
Several crypto-market experts have tipped bitcoin to hit all all time high of $100,000 or more by the end of 2021. Though its recent falls have dampened its prospects.
Most ordinary investors would not think of speculating on pure currencies such as the US dollar or Japanese yen. This is because currency trading is seen as a highly technical, full-time activity.
Instead, people interested in the sector could gain access to it through a less direct route. For example, by buying shares in companies that:
Develop blockchain technology
Run crypto exchanges
Whatever your view, there is no denying that these “boom and bust” cycles have been a feature of bitcoin’s whole existence, so some big ups and downs seem highly likely.
How risky is investing in bitcoin?
Crypto is very risky and not like conventional investing in the stock market.
Bitcoin’s value is based purely on speculation. This is different to company stocks where the share price will move depending on how the business is performing.
In October 2020, Bank governor Andrew Bailey said he was “very nervous” about people using bitcoin for payments. He previously warned that crypto investors should be prepared to lose all their money.
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.
How to invest in bitcoin and make money
Like any investment, making money depends on what price you buy and sell an asset for. If you sell when its price is higher than you bought it for, you will make money.
If you sell for a lower price than you bought it for, you will lose money.
For example:
If you had invested in bitcoin at the start of 2020 and sold on 31 December 2020, you would have made a 300% profit
If you had invested in bitcoin at the start of 2018 and sold on 31 December 2018, you would have made a 73% loss
Bitcoin is extremely volatile so the trick is not to panic and crystallise your losses by selling when its value inevitably falls. This is the same with all investments.