Is Bitcoin The Best Investment For Me?
Investing money is a personal matter. Bitcoin has been around for about 10 years but has gained greater press coverage over the last 6 months or so. This post provides you with a few ideas to think about before investing.
How Long Are You Investing For?
Investment is a long-term process. The longer the investor remains invested the better the potential returns. Most professionals will recommend a period of at least 5 years. This does not mean you should necessarily remain invested in the same fund for 5 years. However, the money should be committed for this term. This is because the economic cycle lasts 3-5 years. The shorter the investment term the less likely you are to achieve a return greater than cash in the bank.
What is Your Objective?
Investment for its own sake is not particularly exciting for most people. It is the result which inspires them to keep going even when times are tough. When investing there should be a goal. This goal has a greater chance of being achieved with a careful written plan.
Broadly there are two objectives: growth and income. If a person is investing for school fees, they are seeking growth on their money initially. Whilst a person entering retirement is looking for income. Bitcoin does not provide an income to investors.
Is there anything else?
Increasingly, profit at all costs is not the only objective. There are other aspects of investment that need to be considered. These can be investing in compliance with religious beliefs, such as Sharia. Investors may also require their investment to comply with ethical or socially responsible parameters.
Crypto-currencies consume a significant amount of energy to be produced. Due to the many variables concerned it is difficult to evaluate the exact cost of mining each Bitcoin. It is estimated each Bitcoin requires 72 terawatts of power to be produced. By comparison, in 2010 the whole of the USA consumed an average of 3.3 terawatts. Source.
What Has Been Your Experience of Investing?
If you have invested money before, how did you do it and what was your experience? What did you learn in the process? What would you do differently now? One of the most useful documents when starting to invest is an investment statement.
This document details potential events which you foresee happening. For example, a drop of 20% in your investment, what you will do in those scenarios and why. The investment statement provides you with a rational response to follow. A pre-planned response avoids the emotions of the moment. Emotional responses in investment are rarely the right ones when it comes to market volatility.
What Other Assets Do You Have?
If you have assets of £10 million and you are investing £100,000, you will take steps to ensure the investment is appropriate for you. However, if the investment performs badly, your lifestyle will not suffer greatly.
If you have assets of £200,000 and you are investing £100,000 the situation is much worse if the investment underperforms. Therefore, investors tend to consult a professional when they invest a relatively high percentage of their total assets.
A Return Of Your Investment
Investing in funds based outside of the main global financial centres can be risky. Often these investments are not available within an expat’s home country due to regulatory issues. Many years ago, a fund manager told me, “Investors first expect the return OF their money then they look for a return ON their money”. She was referring to the liquidity of investments.
The ability to draw your money out of your investment at a moment’s notice whenever you wish is important. This is especially important for expats whose lives can change suddenly. Funds that have suffered from liquidity issues in the past include those investing in real estate and non-traditional assets. Non-traditional assets are anything other than cash, fixed income securities (bonds), and equities (shares). Crypto-currencies such as bitcoin are certainly in the non-traditional sector.
This just means, don’t put all of your eggs in one basket. Spreading your money between different investments reduces risk.
So, Is Bitcoin A Good Investment?
I first wrote about Bitcoin in 2017. Over the last 4 years, I have not seen anything to change my views. It is an interesting experiment based on some potentially very useful technology (block-chain). I would not invest my own money in Bitcoin, and I would not recommend it to my clients at this time.
The reasons for this are:
- Lack of regulation, which makes it so useful for criminal activity.
- The millions which have been stolen by hackers or lost to owners.
- The significant fluctuations in price are further evidence of a bubble.
- The environmental impact/energy consumption of mining Bitcoin.
- The availability of safer mainstream investments.