Personal Finance: The Main Risks Of Investing In Bitcoin | What Bitcoin Teaches Us About Risky Investing?

Whether you believe that Bitcoin is inherently useless or can eventually make $650,000, there is no doubt that it has become a very interesting asset class for investors (although for different reasons than the recent morale of the financial world: Game Stop).

The leading asset manager featured in Investors’ Chronicle magazine last month also recommended that a reader include a small allotment to cryptocurrency as part of their retirement savings. Bloomberg Wealth has also written a couple of guidelines on bitcoin investing.

But if Bitcoin has really gone into the mainstream, what does that mean for your personal money and investments?

On its face, Bitcoin is neither intrinsically valuable nor is it a reliable store of wealth. It certainly does not generate revenue. However, it has two features that can make it suitable for a very compact portfolio.

The first is its instability. Many view the volatility of Bitcoin with horror. Indeed, the UK’s Financial Conduct Authority has repeatedly warned cryptocurrency investors for a specific reason.

Between December 2017 and December 2018, the price of Bitcoin dropped by about 85%. But after that Nadir, it has increased more than tenfold, showing that instability can cut both ways. The greater the volatility of the investment, the greater the potential loss.

If I had invested one percent of my retirement savings in an FTSE 100 company a year ago, I would have wasted my time. My investment would be too small to add much side lattice if the stock had risen 20% or 30%.

Indeed, the FTSE actually fell last year. However, if the worst had happened and the company had declared bankruptcy, I would have had only a one percent stake.

Bitcoin volatility offers a greater likelihood of meaningful gains, while still promising the same small, managed amount. In the past year, its prices have more than quadrupled. If I had invested the same one percent of my retirement (full ad: I currently have no bitcoin), it would have contributed more to my portfolio.

Thanks to the volatility of Bitcoin, unless you can rely on animal husbandry, there is a possibility of real gain without much harm.

Its other main feature is that it is not a profitable investment. Unlike foreign exchange trading programs, which allow inexperienced investors to gain huge profits in trading currencies, your losses with Bitcoin are limited to your initial share. Many other get-rich-quick schemes, including contracts for difference or CFDs, rely on debt to some extent.

With leveraged investments, you almost immediately lose the money you have borrowed, which is worth your investment. With Bitcoin you usually stand up, just to lose your initial stake — unless, of course, you borrowed to trade in cryptocurrency as well.

It was the relative absence of leverage that was the difference between the dot-com bubble burst in 2001, which led to a mild recession, and the 2008 financial crisis, which devastated almost the entire banking sector. Although some debts were involved in 2001, most losses were incurred by “real money” investors.

During the 2008 crisis, many banks and commercial investors were unable to refinance borrowings behind the expected safe AAA assets, forcing them to sell the assets so as not to increase losses.

Where the investment has not been evaluated, you live to fight the next day even after a very serious loss. For example, people often lament for those who failed to buy shares in tech giants like Amazon.com Inc. when the bargains were on basement prices. At the turn of the century, Amazon’s share price was $113. Today the price of the same stock is about $3,300.

But what is usually forgotten is that between 2000 and October 2001, you will lose 95% of your money, as the price has dropped by $5.51. Just by continuing the dot-com recession and so far you will get your 2,740% reward. And if you kept shares using leverage you wouldn’t be able to do that.

Read more, Digital Gold Currency: What is Bitcoin Actually Worth?

Of course, losing 95% of your initial share on a regular basis is not a sustainable investment strategy. Neither is Bitcoin for everyone, as underlined by its $10,000 decline since January 8. Most financial advisors are definitely not keen.

But to point out, as some are doing, those crypto assets are unlikely to be able to access services like the UK’s Financial Services Compensation Scheme — which pays customers in a position under the Financial Services Firm — it’s something red herring. If you invest in any FTSE 100 listed company or game stop and either fail, you will not get that protection.

So, if you have a few pounds that you can lose, there are many worse things to buy right now than the most popular cryptocurrency in the world.

Originally published at https://www.timeup.xyz.