Cryptocurrencies – The Future of Money?
No doubt many of you have would have heard of Bitcoin as it has rose to prominence in the last few years; probably due to its meteoric rise in value, the current price is £42,152 (as at 9th April 2021). It has however, suffered significant fluctuations in price since its launch in 2009.
Bitcoin is the most well know Cryptocurrency; however, there are over 4000 Crytopcurrencies in existence.
Bitcoin was developed using Blockchain Technology which offers a highly secure way of storing records in a digital ledger. At launch, Bitocin encouraged people to mine their own Bitcoins utilising their own computers; there are only 21 million Bitcoins available, of which around 18.6 million have already been mined; initially, the mining was relatively easy; however, as each Bitcoin is mined, it creates a further record in the ledger which means future Bitcoins require more computer processing power to be mined. The energy needed to mine a Bitcoin now is eyewatering; it is estimated that the energy being used for Bitcoin mining is on par with Chile's total demand.
So How Does Bitcoin Work?
The concept of digital money is not that strange; after all, many of us will have transferred money from one bank account to another using online banking; cryptocurrencies do the same using blockchain technology. The difference being unlike the Sterling or the Dollar, cryptocurrencies are decentralised and are not regulated by a government or central bank, which means they can be easily transferred globally without having to deal with currency exchange rates. That sounds good in principle; however, the price is very volatile, so what you end up paying could fluctuate by the minute. At the moment very few legitimate businesses accept cryptocurrencies; having said that, more are talking about it being a future payment method.
Are Cryptocurrencies an Investment?
Bitcoin and other Cryptocurrencies are not an investment in our opinion; they produce no income like a share paying a dividend, a property paying a rental income or a government bond paying interest.
The only mechanism driving up the price of cryptocurrencies at the moment is speculation that you can sell it at a higher price than at which you purchased.
You cannot dispute that the price has increased dramatically over specific periods, but it has also fallen severely at time. For example, if you had invested at the start of 2018 and panicked and sold on New Years Eve 2018, you would have lost 73% of your investment. This is high volatility by anyone's
What also puts us off from investing is there is no Investor Protection for Bitcoin. The Financial Conduct Authority does not regulate the sale of Bitcoin and has banned the sale of derivatives and other instruments based on cryptoassets. The Governor of the Bank of England Andrew Bailey has said that investors in cryptocurrencies "should be prepared to lose all their money". This is certainly a warning shot across the bows but many will not be put off as they risk all to speculate on Bitcoins scarcity.
So Are Cryptocurrencies The Future of Money?
No one knows the answer to that; they could remain niche or become more mainstream as companies such as Starbucks and Tesla look at ways of incorporating them to pay for a coffee or a car.
Understandably, Governments are nervous about a stateless currency, and in light of this, Central Banks are looking at launching their own digital currencies. Recently the head of central bank digital currencies at the Bank of England Shiv Chowla said, “With a very large pinch of salt, you could see central bank digital currencies going live by the end of this decade.”
I think we can all agree that we live in a rapidly changing world, and it’s hard to believe that Bitcoin or another Crytocurrency will not have some impact in the future. In the meantime, at Octagon, we will look on with interest and continue to advise on the assets we fully understand and have a long track record, such as equities and bonds.
This article does not constitute advice. Anyone considering any form of financial planning should seek independent financial advice. Octagon Consultancy Limited is authorised and regulated by the Financial Conduct Authority (FCA). You should note that the FCA does not regulate tax advice. Past performance is not indicative of future results. The value of your investment may go down as well as up.