It’s fair to say that Bitcoin investors have been on somewhat of a rollercoaster over the past couple of months. Sure, volatility is a reality with any investment, but Bitcoin has taken that motto to a whole new level.
Huge swings, both up and down, have become the norm and have led seasoned investors to label Bitcoin and other cryptocurrencies as a “fad” and even a “scam” while others swear by it as the investment of the future. As Bitcoin investing becomes a relevant topic that continues to split opinion even in the most learned financial circles, people are also making – and losing – a lot of money.
But what exactly is Bitcoin? Bitcoin is a global digital currency which operates without the need for a central bank system – it’s purely peer to peer. Bitcoin was invented in 2008 by Satoshi Nakamoto, although it is now believed this is a pseudonym for the person, or group of people, who actually created the first cryptocurrency. Bitcoin can be used to buy a wide range of products and services. For example, in late February, a Toronto home owner placed his Mississauga condo on sale for 35 bitcoins, which was worth $445,000 at the time of listing.
Why should I care about Bitcoin?
Bitcoin is the hottest investment story since the beginning of 2017. Over the past nine months, Bitcoin has gone from achieving jaw-dropping growth and attracting a cryptocurrency rush among investors to losing around half of its value in the the first few weeks of January. Bitcoin hit its peak value of almost $20,000 USD in December 2017; today it sits around $8,500 USD.
How are bitcoins created?
Bitcoins are created through a process called “mining,” in which powerful computers are used solve complex mathematical equations in order to add records to Bitcoin's public ledger of past transactions. “Miners” are rewarded for managing other people’s Bitcoin transactions and verifying them as genuine.
Why do people invest in bitcoins?
Like any volatile market, the swings in bitcoin value give investors the ability to make large sums in a short period of time. On the other hand, that volatility also means bitcoins probably aren’t the best choice for an investor following a cautious or balanced approach. Another positive for aggressive investors is the fact that Bitcoin is not correlated to other asset classes, meaning the price of bitcoins will not be affected if the rest of the stock market crashes. Some of the industry’s top players are fully committing to Bitcoin. In February, the chief executive officer at educational company Inside ETFs Matt Hougan announced he was leaving the exchange-traded-fund industry after 15 years to join Bitwise Asset Management Inc. as vice president of research and development.
“When I think about individual applications, like gold which is a $3 trillion market, there’s the idea of bitcoin as millennial gold,” Hougan said in a recent interview. “It’s a multi-trillion-dollar opportunity, and then when you get into utility tokens, each of those markets can be substantial.”
Why is Bitcoin controversial?
The world of cryptocurrencies has been described as the “wild west” of investments by some insiders, and it’s difficult to disagree. Scandals and rip-off attempts seem to emerge weekly. Most recently, the Ontario Securities Commission issued a temporary cease trade order in February against a company and two individuals who it said appeared to be involved in a bitcoin-focused multilevel marketing scheme. The OSC said that Dubai-based USI Tech appeared to be involved in a scheme targeting investors and encouraging them to buy bitcoin packages.
Also, earlier this year, the U.S. Securities and Exchange Commission (SEC) halted trading in three companies with assets tied to cryptocurrency and blockchain technologies, saying it had questions about their business operations and the value of their assets. In announcing the trading suspensions, the SEC sent a warning to investors.
“Investors should give heightened scrutiny to penny stock companies that have switched their focus to the latest business trend, such as cryptocurrency, blockchain technology, or initial coin offerings,” Michele Wein Layne, director of the SEC’s Los Angeles office, said in a statement.
What caused the massive slump in early 2018?
The value of many investments is directly related to market sentiment, and Bitcoin is no different. The cryptocurrency has suffered a wave of negative headlines in recent months and the clampdown by regulators and governments around the world has also played its part.
In early March, Bitcoin slumped more than 20% in a week amid increasing regulatory scrutiny in the U.S. and Japan, in addition to an attempted theft back in January at one of the biggest cryptocurrency trading venues, Tokyo-based cryptocurrency exchange Coincheck.
Asian governments are also taking a firm stance. South Korea is considering banning trading in virtual currencies and the Chinese government has started taking a closer look at Bitcoin mining operations. Facebook also took a stand, saying it would halt ads promoting cryptocurrencies and initial coin offerings, which it described as “financial products and services frequently associated with misleading or deceptive promotional practices.”
What’s next for Bitcoin?
Despite the negative headlines, it’s not just scammers and fly-by-night operators who are investing in bitcoins. Some of the biggest industry players are invested heavily into both cryptocurrency research and the development of cryptocurrency investment vehicles. Leading investment firms are vying to become the first to launch a Bitcoin ETF.
In late January, Canadian investment fund manager 3iQ announced it had agreed terms with regulators to act as the first Canadian money manager allowed to invest in multiple cryptoassets. 3iQ’s Global Cryptoasset Fund is invested in Bitcoin, Ether, and Litecoin, and is open to accredited investors, advisors, and dealers via the Fundserv platform.
Is a Bitcoin investment the right move for me?
As with any investment, you have to first clearly define your tolerance to risk. If you’re a cautious or balanced investor and the entirety of your portfolio is needed for retirement or higher education, cryptocurrencies may not be the best bet. But if you have the luxury of having some “play money” in your portfolio, a Bitcoin investment could prove to be extremely lucrative. Just remember to be prepared for the roller coaster ride that is Bitcoin investing.