The problem with investing in bitcoin is that it instinctively feels too good to be true.
The largest cryptocurrency by volume is worth 600 per cent more today than a year ago, soaring from about $7,000 per bitcoin to $54,000 this week, along the way becoming one of the best performing financial assets of 2020. Despite including some extreme price swings, the year-long rally has so far defied fears of a repeat of bitcoin’s spectacular price crash of 2018.
Eye-popping returns are making it difficult for even hardened cryptocurrency sceptics not to consider putting money into bitcoin and many long-term doubters are crumbling. Jamie Dimon, chief of US banking giant JPMorgan, is just one prominent crypto bear who turned bullish in recent years. Recently emerged cheerleaders include Tesla chief Elon Musk and a number of billionaire hedge fund managers who are convinced that as the digital equivalent of gold, bitcoin’s exchange rate against conventional currencies has even further to soar.
So is bitcoin just a big Ponzi scheme or a genuine investment opportunity? Should retail investors give in to the temptation to pile in? FT Money has spoken to finance professionals inside and outside the cryptomarket and found that opinion remains sharply divided. The recent stellar performance has turned some bears into bulls. But hardcore naysayers warn that a bubble that has grown bigger is still a bubble.
Even ardent crypto fans are reluctant to wager their life savings on an asset associated with hair-raising levels of volatility. Even among these enthusiasts, many limit their investments to 1-2 per cent of their portfolio.
Regardless of whether cryptocurrencies turn out to be the digital equivalent of gold in the long run, today they are providing fraudsters with a rich hunting ground.
Since the start of January, bitcoin’s value has risen by 85 per cent and in mid-April it hit the latest in a series of record highs at $65,000. Companies that operate in the digital currency sector are attracting a flood of money. In a recent (conventional) stock market flotation, investors valued Coinbase, the cryptocurrency exchange launched less than 10 years ago, at $72bn, putting it equal with BNP Paribas, a French bank with roots stretching back to 1848.
Young people are in the vanguard of investing. In the UK, millennial and Gen Z investors are more likely to buy cryptocurrencies than equities and more than half (51 per cent) of those surveyed had traded digital currencies, research from broker Charles Schwab shows.
After a year of spiralling prices, bears warn of the growing risk of a 2018-style collapse. Bitcoin bulls argue that the current rally is different from the 2018 bubble burst, when the price collapsed from above $16,000 to just $3,000. Today, they say, it is driven by demand from professional trading firms and institutional investors whose presence brings stability.
Not everyone agrees. “It’s not different this time. There are no new eras, despite what the promoters tell you,” says David Rosenberg, a Canadian economist and president of Rosenberg Research. “Asset price bubbles come, bubbles go, but none of them correct by going sideways.”
In contrast with younger investors, those aged 55 or over remain resolutely on the margins with just 8 per cent of survey respondents in this age group trading digital currencies, the Charles Schwab study found.
They may be right to do so. Investors globally have lost more than $16bn since 2012 in cryptocurrency-related scams and fraud, according to disclosure platform Xangle. The Financial Conduct Authority, the UK’s financial watchdog, warned this year that investors can lose 100 per cent of their money when punting on cryptocurrencies. It has not sought to block cryptocurrency dealings but has forbidden the sale of derivatives on crypto assets to UK retail customers.
As crypto markets are unregulated, investors have no one to turn to for help if they fall victim to fraud. Exchanges can turn out to be bogus and their founders disappear. A new coin might turn out to be a tissue of lies.
“There are a lot of scams and criminal operations that target individuals and it’s very important to recognise that in an unregulated market there is no recourse,” says Ian Taylor, the chief executive of lobby group CryptoUK.
Another concern for investors is the environmental footprint of cryptocurrencies. The carbon emissions associated with bitcoin equal that of Greece, according to research by Bank of America, because the coins are created or “mined”, in vast computing centres, which burn electricity and generate heat.
In the UK the easiest way to access cryptocurrencies is to buy a portion of bitcoin on an established exchange such as Coinbase. Given that exchanges have suffered outages, been hacked or collapsed, this is the safest approach, though it is more expensive than other exchanges.
Coinbase typically charges a spread of about 0.50 per cent plus a fee depending on the size of purchase and payment method.
Fintech companies such as Revolut also offer a way in for bitcoin buyers, but there is no way to transfer bitcoins from the app elsewhere or into other types of coin. Since they may only sell it back within Revolut, investors only nominally own bitcoin via the app.
In the US, investors are able to buy shares in diversified cryptocurrency funds such as Grayscale, which can then be bought and sold like other mutual holdings. Institutional investors can also buy into exchange traded products but these are inaccessible for retail investors in the UK. It is possible to buy into products that offer exposure to companies active around blockchain — the public, digital ledger than underlies bitcoin — such as Invesco Elwood Global Blockchain UCITS ETF. These are a bet on technology, however, rather than the cryptocurrency.
Selling cryptocurrencies also has tax implications. Digital assets count as property for accounting purposes and profits may be subject to capital gains tax.
Scammers are a growing problem. Some ask investors to send their private keys to their crypto holdings, promising to return with a profit. But once done, there is no way to undo a transfer.
Lihan Lee, co-founder of Xangle, advises potential investors to check the past records of any crypto investment schemes, while CryptoUK’s Taylor warns of posting about cryptocurrency investment on social media or cold callers promising guaranteed returns.
“If a stranger walks up to you on the street and says they’ll give you £150 if they can borrow £100, you probably wouldn’t give them the money,” he says. “It’s the same with crypto.”