Hi readers and followers! I continue my cryptocurrency series and this one is dedicated to cryptocurrencies risk and advantages using and/or investing in the alternative payment option!
Most of you probably know my opinion on the subject. I believe cryptocurrencies will play a big role in the future to come and we should embrace them, accept them and if possible make money from this rise.
I would like to start with a video published by the good folks of Fortune Magazine:
Bitcoins for example are trading over $3200/BTC at the moment. The big question is whether a crash is coming or whether cryptocurrencies have hit their stride. Should investors cash out now while the getting is good, or buy more now before the price climbs even higher? So far, when it comes to bitcoin, the only real rule is volatility.
Bitcoin has crashed before. In November 2013, bitcoin jumped from trading at about $200 to more than $1,200. It was trading at less than $600 within three months and took until March of this year to hit $1,200 again.
“This is highly speculative, you need to be prepared to lose everything,” says Harvey. He says that’s true for stocks too, but that bitcoin is more volatile than practically any other type of asset, including the stock market. Cryptocurrency is still a young technology, and it still faces many challenges, not the least of which is a potential schism within the bitcoin development community.
But there’s reason to be optimistic about the future of bitcoin and other cryptocurrencies, says Adam White, head of the institutional trading arm at bitcoin exchange startup Coinbase. The 2014 crash was triggered by the collapse of the exchange Mt. Gox. Exchanges have become more stable since then, White says, and regulators are starting to adopt common-sense policies to protect consumers.
And while prices have risen and fallen in recent years, the overall trend is upwards. That makes investing in bitcoin and similar digital currencies attractive, especially at a time of political uncertainty and economic unease. Last year, Coinbase—which clearly has a horse in this race, since it makes money facilitating cryptocurrency trades—commissioned a study that compared bitcoin to other financial assets. The research found that while bitcoin is indeed extremely volatile—far more so than real estate, oil, or stock—the rewards are unusually good for the risk. The Sharpe Ratio is a measure used by investors of how risky an investment is compared to its typical returns. According to the report, cryptocurrencies have a surprisingly high Sharpe Ratio—better than any other asset class, including bonds and US equities, depending on the timeframe.
But Harvey still urges caution. Even assuming the Coinbase study calculated the Sharpe Ratios correctly, there’s still very little history to base the calculation on. “For stocks and bonds, we have 100 years of data,” he says. Bitcoin, on the other hand, only came online in 2009.
Still, when you’re looking at the sorts of returns bitcoin has provided recently, any amount of risk will look good. “But do you really expect to keep seeing returns of 200 to 300 percent?” says David Yermack, a New York University professor of finance. “You’d have to have all the wealth in the world in bitcoin to keep that up.” In other words, past performance is not indicative of future results.
That’s not say that cryptocurrencies are necessarily a bad investment, so long as you know the risks. Just don’t count on the price to keep rising forever. All gold rushes come to an end one day.
Just like any investment opportunities, owning Bitcoin requires deeper knowledge of its capabilities to grow as an asset. But with seemingly rising tides investors must also be prepared when value decreases. However, here is a list of the top 5 things you should consider:
Various countries are now looking at the possibility of regulating the cryptocurrency, given its widespread adoption. But, the currency is being linked to various criminal transactions, forcing some governments to ban the usage and sale of Bitcoin. If national governments regulate Bitcoin, then it won’t be too dissimilar from physical money.
Cryptocurrency is entirely digital, thus it’s not safe from hackers or criminals. Once they get your private encryption key and transfer the stolen Bitcoins to their accounts, it is permanent and irreversible.
Although it’s not affected by any economic changes, Bitcoin still faces problems with fluctuating value. If there is a decline in its acceptance across the world, then expect it to lose value and potentially become worthless.
Given its anonymity due to the P2P transactional nature of the cryptocurrency, the electronic currency has been linked to several criminal acts. In fact, the US Federal Bureau of Investigation (FBI) fears the growing popularity of Bitcoin with criminals, as they have “more difficulty identifying suspicious users and obtaining transaction record.” Thus, again, regulation and possibly risk of currency collapse are possible if this trend continues.
The US Internal Revenue Service (IRS) announced that it has considered Bitcoin and other alternative cryptocurrencies as property for the purpose of federal taxes. Bitcoin is ineligible to be in any tax-advantaged retirement accounts, and there’s no legal solution to shield the investment from taxation. In terms of insurance, Bitcoin accounts are not covered by any type of federal or government program. Thus, a collapse in its value means a collapse in your overall investment portfolio, so think twice before making it as an alternative investment opportunity.
On the other side of the Bitcoin
Bitcoin is the latest innovation to currency and commercial transactions we have witnessed since Paypal. As businesses continue to adopt this cryptocurrency as a mode of payment, its appeal as an alternative investment will continue to grow. However, it is clearly not without risk to say the least, which should be considered before making any significant moves towards investing in the virtual currency.
And just yesterday, findaWEALTHMANAGER.com’s Co-Founder, Lee Goggin, commented in an article with UK’s This is Money, “From Bullions to Bitcoins, the Old and New Safe Havens“, that there are more viable alternatives to alternative investments and typical safe havens that investors should consider, especially in the current global market climate.