Should you invest in cryptocurrencies?

The price of Bitcoin is going through the roof – but the jury is out on if the amazing 700% rise this year is a bubble set to burst or a sound investment.

Investors and traders are talking Bitcoin and other cryptocurrencies, such as Ethereum, but they would as they have the most to gain from the stratospheric increase in value since the start of 2017.

On January 1, a Bitcoin was valued at $997. On November 23, the price had soared to $8,188, hitting a peak of $8,238 a couple of days earlier.

Banks and analysts are denouncing cryptocurrencies as a fraud and scam, but then they would as they are outside of the Bitcoin circle.

Built in weaknesses

A cryptocurrency has what seem to be built-in weaknesses:

• Governance is almost non-existent as cryptocurrencies are outside of the control of any government or central bank, leaving them open to manipulation
• Investors with stakes held in electronic wallets are prone to losing their money to hackers and crooked traders.
• Cryptocurrency prices are volatile. Although Bitcoin has put on more than 700% in a year, the price dropped from $7,458 to $5,857 in three days earlier in November.
• Bitcoin has a torrid reputation as a channel for crooks and money launderers to flush their cash due to the secret nature of how transactions are conducted.

Financial regulators in China, the USA and Britain have all recently warned investors to stay away from cryptocurrency initial coin offerings (ICO) and contracts for differences (CFD).

ICOs are like crowdfunding – investors are rewarded with cryptocurrency for investing in a business.

CFDs are bets on the change in value of Bitcoin, Ethereum and other virtual currencies.

High risk investments, say watchdogs

“These are an extremely high-risk, speculative investments,” says the watchdog, the Financial Compliance Authority. “You should be aware of the risks involved and fully consider whether investing in cryptocurrency is appropriate for you.”

The cryptocurrency market is insignificant compared with world currencies. Around 16 million Bitcoin are held online, compared with $1.58 trillion in circulation.

Investors can stake their money on Bitcoin just as they can on shares or other commodities.

If you are into a cryptocurrency, you are either an investor or trader.

Speculators will buy cryptocurrency and hang on to the Bitcoin or ethereum and sell as soon as they can see a profit.

Investors will keep their cryptocurrency hoping for a long-term increase in value.

IRS wants to tax cryptocurrency trades

Although Bitcoin is the most well-known cryptocurrency, there are more than a thousand online.

To buy into one, investors must go through a third party, such as a trading platform, broker or exchange.

Coinbase is probably the largest cryptocurrency exchange, but the owners are in the middle of a vicious court case with the US Internal Revenue Service who have applied to a court for an order to reveal the firm’s customer database.

The IRS says millions of transactions have taken place via Coinbase, but only 800 Americans have volunteered information about their trades over several years.

The IRS wants to tax profits on cryptocurrency trading and believes the move could raise millions of dollars.

Bitcoin profits

As cryptocurrencies are not regulated and recognised as currencies, any profits from trading are subject to capital gains taxes.

Whatever your view on cryptocurrencies, some people are making money from investing in Bitcoin.

How many and how much is not known.

While Bitcoin is flourishing, the other thousand or so cryptocurrencies are not doing anywhere near so well.

Our opinion

Investing in cryptocurrencies is as good as gambling, however there is no denying that what was thought to be a short-term hype has become a serious investment for many - including banks. If you're going to invest in a cryptocurrency remember that they are very high-risk so do your research, diversify and do not dip into your retirement savings for this!

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