Digital currencies are continuing to make headlines. Berkshire Hathaway, the company of star investor Warren Buffett, has bought $1 billion worth of stock in a digital bank focusing on cryptocurrencies.
Regulators and central banks remain concerned. The price of bitcoin plunged to $34,000 in February from $69,000 in November. So should you join the hype or run a mile?
What is bitcoin and how does it work?
The concept of digital money that you use online is not that complicated in itself. After all, most of us will be familiar with transferring money from one online bank account to another.
Cryptocurrencies like bitcoin are digital assets that operate like normal currency, but with notable differences. They use peer to peer payment methods, without the banks taking a cut with every transaction. There are no physical versions of the coins either.
Each bitcoin is created (or mined) using an encrypted code, which is a string of numbers and letters. The same equation used to create the code is can “unlock” it (like a virtual key).
Other important points about bitcoin:
- Cryptocurrencies, like bitcoin, ethereum and cardano, are a form of payment that uses blockchain technology to send data in cyberspace
- Each bitcoin must be mined
- It is finite: only 21 million bitcoins that can be mined in total
- Cryptocurrencies are “decentralised” meaning they are not regulated by a financial authority, like a government or central banks
- Most platforms will allow bitcoin purchases using credit cards (bear in mind that your credit card provider will probably charge you a fee to do this)
Should I invest in bitcoin?
Bitcoin is extremely volatile. If you are willing to take the risk, first make sure you understand what you are investing in and have a crypto investment strategy.
Also make sure you aren’t investing simply because you have a fear of missing out. There are a number of questions you should ask yourself before getting involved:
- Do I understand what I am investing in and how bitcoin and the crypto market work?
- Am I happy with the level of risk?
- How much more expensive is it now compared to a few months ago? If so, why am I wanting to buy a thing because its price is higher? Where else in my life do I do that?
- Is there any evidence to suggest prices could rise even higher?
- If I buy it now with a view to sell it for even more later, who do I think will buy it from me for that higher price and why?
- If an asset is so great, why was I not interested when it was much cheaper?
- Have I convinced myself that I am in some way “in the know?”
If you don’t have answers to these questions, it’s probably not a good idea to invest. If you do buy bitcoin, make sure you aren’t putting money you need on the line.
Things to consider before investing in bitcoin
Like any investment, cryptocurrency comes with risks and potential rewards. Compared to traditional types of investments, cryptocurrency is particularly risky.
Here are some things to think about before you invest:
- We definitely don’t recommend investing all your life savings on cryptocurrency markets
- It’s best to see it a bit like gambling so only invest small amount of your disposable income and be prepared to lose the lot
- Never invest more than you can afford to lose
- If you haven’t got much money left at the end of each month, it’s best to steer clear of crypto and focus on saving your money instead
- Like traditional assets, it’s best to treat cryptocurrency as a long-term investment to give you the best chance of making money
- Cryptocurrencies are extremely volatile, subject to bull runs and market crashes
Ways to invest in bitcoin
Buying the coins (or unit of a coin) on a cryptocurrency exchange is the most common way of investing in bitcoin.
But there are other options:
Buy shares in bitcoin-related companies
You could invest in cryptocurrency exchanges or even buy shares in companies that are accepting bitcoin as payment.
Bitcoin ETFs
You could invest in a bitcoin exchange traded fund ETF. This copies the price of the digital currency, allowing you to buy into the fund without actually trading bitcoin itself.
Invest in blockchain technology companies
You could invest in the blockchain network (the system for recording information about crypto). For example, tech platform Solana claims to be the fastest blockchain in the world.
Bitcoin funds
Several investment companies are launching bitcoin funds.
It will still be volatile, but it could be easier to sell your investment and get your money back than investing directly.
There are also funds that have some exposure to bitcoin as well as traditional assets like shares and bonds.
