Craig is joined on The Mortgages, Money and More Podcast by regular guest, Jason Murgatroyd to discuss cryptocurrency and the benefits and risks of investing in this growing area.
What is cryptocurrency?
Bitcoin is a digital currency. It’s the same kind of concept as pounds, dollars etc., but it is purely a digital asset. Its value is based on demand, and the volatility and fluctuations are driven by speculation. Elon Musk is quite outspoken about Bitcoin, but every comment he makes it has a massive impact on price.
It’s becoming more mainstream all the time. Amazon has said it is looking to accept cryptocurrency as payment and you can already buy some vehicles on Autotrader with Bitcoin.
Is it safe to buy Bitcoin?
At the moment cryptocurrency is completely unregulated: it’s not governed by any central banks. And that was the original point behind it – to create something that isn’t controlled. But it seems inevitable that as it becomes more widespread, governments will want to create legislation around Bitcoin and cryptocurrency.
You may well find that if you go to a bank now and ask to access funds to buy cryptocurrency, there will be some resistance. Although Bitcoin has been around for more than a decade it’s still early on for it in terms of being accepted in the mainstream.
One of the issues is that it is often used to fund illegal transactions on the dark web. The fact that Bitcoin is seen as the ideal currency to pay for those sorts of things is a real cause for concern.
Another negative aspect to Bitcoin is ‘mining,’ where bitcoin miners verify new transactions to prevent fraud. This involves thousands of computers operating 24/7, using vast amounts of electricity – raising sustainability concerns.
Why is bitcoin so appealing to some people?
It appeals to the younger generation because it’s all online, on a platform, on an app. And when you talk about the potential returns that people are claiming to gain from Bitcoin, the opportunity to make money is appealing. But then the volatility and fluctuations in price make it very risky. In some ways it’s like gambling – there’s an opportunity to win big, or lose.
With investments, though, It’s about weighing up the risks against the potential gains. People are totally in the dark with Bitcoin. There are no real records to look at. We’ve heard about people that have made a fortune, but we don’t necessarily hear about the ones that lose all their funds.
What are the alternatives to cryptocurrency?
To decide that, you need to understand what you’re aiming to achieve and your appetite for risk. If you’re trying to make money very quickly you will always be aiming at the far end of the risk scale. If you’re happy with that, maybe Bitcoin is right for you.
But most people haven’t got that ‘far end’ risk appetite. First and foremost, you must be mindful that with any investments you should aim for medium to long term growth: so at least five years. Bitcoin might be great for long term results, but as we’ve said, it could go either way: up or down.
Looking historically at stock markets, they’ve been around since the 17th century, when they were trading in simple products like fruits and meat. So we can track historical performance. That’s clearly not the same with cryptocurrency, which is why it’s so risky.
Can I expect the same sort of growth from traditional investment?
There are no guarantees, but there are some fantastic investment solutions. Some funds have best of breed investment managers and their past performance and track records are excellent.
You always have to consider the alternative. If you’re not looking for any risk at all, then the only option is cash – putting your money in a savings account. But with interest rates as they are, there’s very little opportunity for growth – plus inflation is chipping away at it. So that’s a risk as well.
While the cryptocurrency market could prove profitable for some, generally the investment market is where you’ll find a much less volatile investment solution with the potential for decent gains.