Frenzied demand for bitcoins has pushed the price of this digital currency to record highs. For the first time the price of one bitcoin overtook the price of an ounce of gold in June.
This is quite an astounding figure, when you consider that people have been trading and investing in gold for centuries. In comparison, the bitcoin was launched less than 10 years ago. But according to figures from Google Finance, the price of bitcoins has rocketed by a staggering 5,000,000% since 2010.
This upward trajectory has become turbo-charged in the last few months, largely been due to increased demand from buyers in Japan, Korea and other parts of Asia.
In the three months to the start of June, the price of bitcoins rose by more than 130%, to peak at $3018.54 on June 11 – according to figures from Coindesk. Prices has fallen back moderately since then to $2,748, but are still showing significant gains. Just over a year ago bitcoins were trading $565.
And it is no longer just multinational billionaires, technology entrepreneurs and tax fugitives are investing in this so-called crypto-currency: a number of online platforms and brokerages – including Hargreaves Lansdown – are now offering bitcoin investments to retail investors.
You might think you need serious amounts of money to invest in bitcoins. But this is not necessarily the case. It’s possible to buy a bit of a bitcoin, known as a ‘satoshi’, for as little as £10.
Of course, just because you can now invest in bitcoins, doesn’t mean you necessarily should. Opinion is divided as to whether bitcoins offer useful diversification and a little excitement in a portfolio for investors who can afford to shoulder a bit more risk – and those who believe this is a bubble primed to burst.
What are Bitcoins?
Bitcoin emerged in the aftermath of the financial crisis. With confidence in the banking system badly shaken, international investors were looking for an alternative way to store and transfer ‘value’. Bitcoin is a digital currency that is created and held electronically.
Unlike conventional currency there are no printed notes or minted coins. This helps keep transaction costs to a minimum, and ensure bitcoins can be transferred from one account to another quickly. It also means bitcoins isn’t controlled by any one single institution.
But this doesn’t mean it is a financial free-for-all. The founder of bitcoins laid down strict rules governing how many bitcoins are created, when they should be issued, and ensuring a transparent log of all bitcoin transactions, known as the blockchain. However, this ‘transparency’ only goes so far: the log lists all transaction made by bitcoin accounts, but there is no record of who owns which account, so users have a degree of anonymity.
Like other currencies, bitcoins can be used to buy goods and services. A number of companies including multinationals like Microsoft and Dell accept bitcoin payments.
But most investors aren’t buying bitcoins as an alternative to PayPal. They are hoping increased demand for this currency will push up its value, helping them make a decent return on their investment.
How Do I Invest in Bitcoins?
To purchase bitcoins you need to download a piece of software, known as a wallet, which stores the digital coding behind each bitcoin. This wallet can be downloaded onto a PC, a mobile device - or you can buy and hold bitcoins through a third-party provider.
Matt Leach, a digital marketing executive with Circus Street, who has researched bitcoins says: “There is an element of risk involved in safely storing these codes. If you keep the wallet on your own computer, you risk being hacked to gain access to your funds. If you use a bitcoin exchange, which is a third-party service you run the risk of the owners absconding with everyone's bitcoins.”
There are now a number of bitcoin exchanges and brokerages that allow investors to buy bitcoins. Some of the biggest are Coinbase, Circle and BitQuick, which are all based in the US; BitBargain based in the UK and CoinCorner which is based in the Isle of Man.
You will typically need two bits of personal ID to set up an account. Some will accept payments by debit or credit card; others will require a bank transfer. Customers should remember though that these don’t offer the same robust protection you get when buying investments regulated by the Financial Conduct Authority.
Alternatively, there are a small number of investment vehicles you can access. This month, for example, Hargreaves Lansdown offered its customers access to Europe’s only exchange traded note, which follows the bitcoin price. It is issued by XBT Provider.
Many people prefer gold ETFs as it removes the cost of storing and ensuring the physical metal. But others have questioned whether you need a virtual tracking tool to track what is a virtual currency.
Should You Invest in Bitcoins?
The question for investors how much further bitcoin prices might rise – and how severe any correction could be.
There has been speculation that prices could surge past $3000 again, but
Charles Hayter, chief executive and co-founder of Cryptocompare said he expects "the party will end" - although pointed out that "exact trigger is yet to be seen".
He said media articles about the phenomenal rise of bitcoin - even those warning about a bubble - may just fuel further speculation in this asset, pushing prices temporarily higher.
Speaking to The Times, Brian Kelly, who manages BKCM, a hedge fund focused on digital currencies, said: “There is no question that we are in the middle of a price frenzy. There will be a correction and it could be severe, but it’s unclear if that correction will start from current prices or from some place much higher.”
Some commentators have predicted that this bitcoin frenzy could transform into a ‘full on mania’ before prices crash back down to earth. There problem could be worsened if ‘bitcoin themed’ investment funds start being marketed to ordinary investors.
Currency investments are inherently volatile - and this is even more true of a new digital currency like the bitcoin. In 2014 for example the price of a bitcoin swung from above the $1200 mark to less than $200. And in recent years, it has been both the best-performing and worst-performing investment.
But Mark Taylor, CEO of the investment platform Selftrade says: “With currencies fluctuating around the world, and negative rates spanning geographies, it’s not surprising that people are considering cryptocurrency. Gold has traditionally been the safe haven asset in times of trouble, but as the impact of changing digital times continues to affect portfolios and assets, the bitcoin development could signal a new era for investors.”
