When I started this article, Bitcoin was trading at $58,306. By the time you read it, the price could be anywhere.
The crypto-currency is giving a whole new meaning to the word volatility. In fact, this is its appeal. As the price bounces around all over the place, it gives traders and investors the opportunity to make big money, quickly.
The problem, as ever, is that they can lose big money just as quickly. Tesla owner Elon Musk has lost $15 billion in a single day, after a plunge in the value of Bitcoin dented his net worth. He’s one of the world’s richest men, and it’s only a paper loss anyway. Other people may find it harder to bear.
It’s all a huge gamble
Few can ignore the lure of fast money. Whenever Bitcoin booms, friends and family ask me whether they should buy it, or other alt-coins such as Ethereum, Dogecoin and Litecoin.
They dream of getting rich quick too. Who doesn’t?
I tell them investing in cryptos is a pure gamble. If tempted, only invest money you can afford to lose, because you could lose all of it.
I also warn them against getting sucked into day trading, which is a loser’s game for nine out of 10 people who dabble in it.
I know, I was one of the nine.
Some people ask me where I think Bitcoin will go next and I tell them the truth.
I have absolutely no idea. Nobody does.
Bitcoin is back
Many people, including me, thought Bitcoin was finished after the price flew to $20,000 in December 2017, then crashed. It was a crazy bubble, and it burst.
This appeared to vindicate old school sceptics such as US billionaire investor Warren Buffett, who dismissed cryptos because they “basically have no value and don’t produce anything”.
Or Nobel Prize winning economist Nouriel Roubini, aka “Doctor Doom”, who said it was ultimately heading to zero.
Both are brilliant men, and you can’t fault their logic. The problem is, there’s nothing logical about Bitcoin.
Its wild price movements are driven by the two strongest investor emotions of all, fear and greed.
Don’t believe the hype
Crypto advocates make grand claims about how the underlying blockchain technology will change the world.
They get excited about Ethereum “smart contracts”, which automatically execute agreements when all conditions are met.
They talk up decentralised finance (DeFi), which allows users to borrow, trade, lend and invest through autonomous smart contracts, and cut out the middleman. Crypto investors can even earn income on their holdings, by lending them out.
It’s all very fancy but only fear and greed can explain why Ethereum price has shot up from $100 to more than $1,800 in the last year, faster even than Bitcoin.
I’m no techie, but I can’t shake the suspicion that Bitcoin and other cryptos are providing answers to problems that have already been solved.
I wouldn’t buy a Tesla with Bitcoin, even if Elon Musk is working on that, because I would have no idea what the car is going to cost in fiat money (which is how I’m still paid).
I’d make a bank transfer instead.
Online crypto transactions are slow, expensive and burn energy as if global warming is a good thing.
If I need to buy stuff online, I have my credit card for that.
A crowded play
Despite this, Bitcoin is achieving respectability, as major institutions buy into it.
Sceptics are turning into fanboys.
Three years ago, JP Morgan’s boss Jamie Dimon called branded Bitcoin “a fraud” and “worse than tulip bulbs”. The bank has changed its tune. In January, it said the price could hit $146,000 in the long term.
MasterCard and PayPal are plotting to bring digital currency payments to the masses.
Tesla purchased $1.5 billion, which helped send Bitcoin’s total market cap rocketing beyond $1 trillion.
Again, the main driver is another old investor emotion, Fear Of Missing Out, or FOMO.
Investment banks and hedge funds know clients will complain if rivals are making big money from Bitcoin, and they’re not. It’s the herd mentality again.
Good as gold?
I bought a couple of Bitcoins some years ago for around $500, and I’m not selling them, just in case they hit $1 million or something.
I’m not buying more, though. Bitcoin is not going to make anybody a multi-millionaire at today’s price.
My tiny crypto holdings play the same role in my portfolio as gold. As a diversifier, and hedge against price movements elsewhere.
Bitcoin is often called digital gold, and the two have surprising similarities. They have few practical uses, yet are in demand as a store of value.
People buy them when other asset classes look vulnerable, or if they no longer trust their government. Neither pay interest or dividends.
Their price can go up as well as down.
I would never hold more than 5% or 10% of my portfolio in either of them.
Reduce your risks
If you are tempted by Bitcoin, my advice still applies. Only invest money you can afford to lose, because you could lose all of it.
There are other things you can do to limit the risks.
Do not throw in all your money at once, but feed it in over several months. Invest on the dips, not the spikes.
Buy as part of a balanced portfolio that includes other asset classes such as shares, bonds, cash, gold, property, commodities and so on.
Bitcoin may be a virtual currency, but you are investing real money in it. This means the oldest investment rule of all also applies. Do not put all your eggs in one basket.
As I finish this article, Bitcoin trades at $48,932. It is down almost $10,000 in the two-and-a-bit days.
By the time you read this it could trade at $20,000 or $70,000. Or anywhere else.
Elon Musk can cope with that. Can you?
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.