An overview on Cryptocurrency
Craig reflects back on this year’s obsession with Bitcoin and Cryptocurrency, following up on July’s episode which features a more in depth discussion with regular podcast guest, Jason Murgatroyd.
Beware the crypto craze!
Three months ago, Jason and I had an in-depth podcast conversation all about cryptocurrencies. I wanted to have a quick recap on that, three months on, as it’s been quite an eventful year for Bitcoin. The cryptocurrency reached a record high and then almost halved in value in the space of six weeks.
It was caused by a ‘walk back’ in May from Tesla’s Elon Musk. Having previously been an outspoken supporter of cryptocurrency, he announced his company would not be accepting Bitcoin as payment for its vehicles. What followed was a series of plunges in its value, not helped by the additional news of Chinese regulators signalling a crackdown on the use of digital currencies.
What is Bitcoin and how does it work?
Bitcoin is a type of digital, decentralised currency, allowing the transfer of goods and services without the need for a trusted third party – a payment engine.
The network is based on people around the world called miners, who use their computers to solve complex mathematical problems that verify a Bitcoin transaction and add it to the blockchain. These miners maintain a massive, transparent ledger of each and every Bitcoin transaction.
An infinite amount of Bitcoin can be produced, and as more is created, the mathematical computations required become increasingly difficult.
Cryptocurrencies can be volatile. Bitcoin is quite high risk, which makes it a poor substitute for money as we know it. The unsteady performance of cryptocurrencies in May shows the speculative nature of this type of asset. Bitcoin and cryptocurrencies have more in common with commodities than currencies. They are much harder to value than cash flow and equities and bonds.
Why should you be cautious about crypto?
Cryptocurrencies are a volatile choice, susceptible to stock market bubbles, which may affect investments negatively during a downturn. Volatility means investors are likely to act on doubts and sell if they fear a fall in return. They’re not a tangible form of investment. They’re not regulated, which can be a red flag when it comes to investing.
Where should you invest instead?
A sensible approach is to invest in high quality, well-established businesses. These usually have strong management teams, serviceable levels of debt and predictable cash flows. To avoid being hit by market volatility, make sure your portfolio is invested in a wide range of assets so it is less vulnerable to market shocks.
Staying invested when there is a downturn can help you get through turbulent times and put you in a good position to benefit from any ensuing recovery. Our finance advisers can help you and your investment choices.
For more about cryptocurrencies, listen to Episode 50 of The Mortgages Money and More podcast: https://mortgages-money-more.simplecast.com/episodes/crypto-currency