THE first decision on investing into anything, such as bitcoins, is to ask if there is any value in it. Is the current price less than what it could increase to?
Remember there are much smarter and more manipulative people out there than us, and they will be happy to take your money. That’s how it works, and for every winner there has to be a loser who bought or sold.
Remember the bigger and more manipulative investors can make as much money on something falling as they can on it rising – this is called shorting.
It would seem sensible, if I thought something was going to fall in price that I would allow it to bubble beyond belief, or even encourage that to happen, then bet on a fall and make off. You may remember the column on oil prices in 2008 where we explained how exactly that would happen.
Albert Einstein explained if “you couldn’t explain something simply, you didn’t understand it”. So, before investing, you should fully understand the concept of bitcoins, where the potential risks are and where the potential upsides will be.
So what are bitcoins? Firstly, they are a payment system. Nothing smart about that, but one of their goals is to be sure they are decentralised (ie, they don’t have to use a central bank). For a very long time, central banks and their greed have been at the heart of much harm and wrongdoing and the independence of using this, or any crypto-currency will be very appealing to many, me included.
On your phone or computer at home for example, you would have a bitcoin wallet (you have Apple pay and contactless payments now, so think like that, but you have bitcoins as opposed to a dollar or pound).
Payments move between person to person on the internet without having to go through clearing houses, so it’s cheaper (try sending foreign currency between banks to see how much you are ripped off – yes, ripped off for pressing one button).
Bitcoins work in every country, and of course ultimately your account cannot be frozen, which is a concern among many, of the control central banks are increasingly taking on countries and people.
Some have mistakenly said that bitcoins are a place to buy without anyone knowing who and what is bought, but actually, the reverse is true as everything is recorded, albeit the name of the person purchasing is anonymous but still identifiable.
Everything has a tipping point for failure or success. It’s the normal adoption cycle of anything that‘s new and different - whether it’s the internet, online payment or even just the phone. The adoption cycle moves from the first two buyers called ‘early innovators’ and ‘early adopters’ through to the huge jump into ‘early majority’ and ‘late majority’ of uptake. The latter two surge the price, and that’s where the masses are, and the money is made. Will bitcoin jump the chasm and make it into the masses?
Most money is made by being ‘in at the beginning’ – the most loss is thinking you are “in at the beginning”.
Unlike pyramid schemes, the currency has a use. At the moment, there are many places for you to use the currency but not enough for it to be mainstream.
Will it become mainstream? Well, there is the question, for if it does, the potential for gain is extraordinary.
Whilst few know how to truly value it, fundamentally its value is based on users and the amount of coins in circulation and the most compelling has it valued at just over $1,100. Today, it is trading at over $7,300 doubling in value since the column valued it in September.
This may not be a ‘Tulip Mania’ moment, but it could easily be a bubble, depending on usage and uptake. Someone is wrong in the valuations, and from the past, everything has to find its correct level. It may go to $20,000 before that level is determined, and that level may well be much less than the aforementioned $1,100.
Remember who doesn’t want it – that’s what you are up against and if you can’t easily explain why you would buy it, you don’t understand it, so don’t buy it. Its inventor is still unknown.
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a question on investments or pensions call Darren McKeever on 028 6863 2692, email dmckeever@wwfp.net or visit www.wwfp.net.
