Articles

Cryptocurrencies: the new virtual reality investment?

7 minutes

When Bitcoin rocketed in value in 2017, you couldn’t move for news stories about cryptocurrencies. But where do we stand in 2019? Was it just a fad, or is this still a worthwhile investment?

  • What exactly is a ‘cryptocurrency’?
  • Just how risky are they as a form of investment?
  • Which are the main ones to consider?

Are cryptocurrencies a worthwhile investment?

Ask someone to explain how ‘cryptocurrencies’ works, and a common response is likely to be embarrassed confusion. Hardly surprising, as they’re still seen very much as newcomers to the investment sector.

Yet the first (and still biggest) cryptocurrency, Bitcoin, was launched some 10 years ago now. As of February 2019, over 17.53 million bitcoins were in circulation with a total market value (then) of around $63 billion… although that valuation is highly unlikely to be the same when you read this.

And it’s that unpredictability in valuation which causes many investors to consider cryptocurrencies as something of a “wild card”.

How wild? After their first few years of existence, when Bitcoins trundled along at around $20, their individual valuation had moved up at the start of 2017 to $967. By the end of that year it had rocketed up to $13,860. Fast forward to the start of 2019 and it had plummeted to $3,689...

Not an investment for the faint hearted!

Ethereum, one of the other main cryptocurrency players, has seen a similar trajectory: shooting up from $13 in February 2017 to $1098 in February of the following year… but now down again to $134… but that’s still a ten-fold rise in two years.

“Due to this volatility,” says Jon Ostler, CEO (UK) of comparison website finder.com, “large companies and governments around the world have been very slow to embrace cryptocurrency as a legitimate currency and form of payment. This has contributed to crypto prices falling steadily since early 2018, and it’s hard to see this changing until some big players truly embrace crypto.”

What’s behind a cryptocurrency?

One of the concerns harboured by traditional investors is that cryptocurrencies like Bitcoin, Litecoin, ZCash, Dash, Ripple and Ethereum, is that they are truly “virtual”. They exist on an (admittedly highly secure) series of computer servers. No comforting notes to hold in your hand (or stash under your bed). No equally reassuring central bank support in the form of gold bars or government guarantees.

So, what exactly IS a cryptocurrency”? According to Wikipedia, it is “a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems.”

Although cryptocurrencies have no physical manifestation, they can be used to buy plenty of products and services, and there are now over 4,000 Bitcoin ATMs around the world, including 201 in the UK, where they can be exchanged for traditional currencies… so they are starting to join the mainstream.

Part of their appeal of is that they are “disruptors” – bypassing central banks – and a reflection of the global economy as well as the digital world we now occupy for so much of our time. If you want to make a trade, there are no banks or intermediaries to get in the way – or take their margin.

It’s worth bearing in mind that the earliest forms of ‘currencies’ - such as coins and bank notes - also demanded a certain amount of faith amongst those prepared to accept them in return for goods or services…

But does their increasing popularity make them a worthwhile investment?

Buy into a cryptocurrency and you can use it to buy goods or services… or sit on it in the hope that it will increase in value. However, to date, just 2.85% of Brits have invested in cryptocurrencies, with younger people far more inclined to take the plunge. According to finder.com research, 4.68% of millennials. 2.77% of Gen X and just 1.58% of baby boomers have jumped onto the crypto bandwagon.

They also identify a gender divide between men (3.66%) and women (2.06%).

Of those who do have holdings, 78.95% have plumped for the best-known name and bought Bitcoin. But you aren’t stuck with the market leader. Around 1,000 alternatives (or “alt-coins”) have also sprung up.

So how seriously should an investor take them?

According to Jon Ostler, CEO (UK) of comparison website www.finder.com, “With physical cash becoming increasingly obsolete and the fintech market continuing to innovate at a fast rate, it’s fair to say that the long-term prospects for blockchain-based solutions are likely to be positive; however, whether any of the current cryptocurrencies will boom or bust is the subject of fierce debate.

“They utilise new technology to offer some features that simply aren’t possible with traditional currencies and payment methods but the market to date has been extremely volatile and the path ahead is still unclear.

“Cryptocurrencies should certainly be regarded as a high-risk investment at this moment in time, but this market moves faster than traditional ones… so it’s worth keeping a close eye on the news if you’re looking for high-risk, high-reward investments.” 

 

And which are the best bets?

 

“At this stage, according to Jon Ostler “it is generally wiser to stick with the bigger, established coins like Bitcoin, Ethereum and Ripple.

 

“New coins are always popping up, but the excitement and bold growth predictions attached to them often proves to be unfounded. Crypto is a volatile market, and this risk is compounded for small coins.”

 

And the acid test: would Jon invest in a cryptocurrency?

 

“I have traded in the past but I would classify those investments as experimental and with an amount of money I would not miss. My portfolio is far more conservative, and equity and property based. Ultimately, you should only invest an amount in cryptocurrencies that you could cope with losing!”