The newbies' guide to bitcoin: should you invest?

It could usurp the monetary system as we know it, but getting to grips with the basics is essential.

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Should you invest in bitcoin? Like all investment opportunities there are conflicting answers, but with bitcoin the difference of opinion is split in an interesting way. If you look at the behaviour and opinions of the traditional investment industry (such as banks, investment managers and independent financial advisers), then the answer is a resounding “no”. Many cite fraud, money laundering and high volatility as the main risks. If you ask tech entrepreneurs, dot.com billionaires and those embracing the sharing economy then the answer is a very loud “yes”. They cite decentralisation, the limited supply and its potential as the opportunity.

If you look for guidance from the government and regulators here in the UK, then things are a little more open minded. The Bank of England believe the currency shows “considerable promise” and George Osborne is committed to making the UK the global bitcoin hub. However regulation is coming and there are warnings of fraud and damage to the economy.

Personally, I don’t know if you should invest in bitcoin or not, but I do know that we are on the cusp of a major financial technology revolution and this baby of a currency is going to play a significant role.

 

Bitcoin epiphanies

It was a 17-year-old coder who introduced me to “the bitcoin”, back in 2011. I was sceptical to say the least.

At the time I was on the research desk of gold investment platform called The Real Asset Company. I believed (and still do) that gold is money. So, imagine my reaction when I was told that something “as good as gold” had been created seemingly from thin air and was going to usurp the monetary system as we know it.

Fast forward four years and I have watched in awe at how bitcoin has shocked its way into the public consciousness. According to the Government Office for Science, “digital currencies such as bitcoin have the potential to replace traditional currency and, by extension, the need for central banking and
regulatory systems”.

 

How can I invest in bitcoin?

At the moment the most common approach to investing in bitcoin is to just buy some. You can do this easily without going through a broker, an independent financial adviser, or otherwise. There are some well-established and well-managed bitcoin exchanges out there who make it easy for you to start trading. First you need an online bitcoin wallet, which you can use to make payments. The website blockchain.info is a popular provider.

There are also some exchange traded fund and hedge fund offerings coming onto the market. In these cases, check their regulatory stays and security measures. Cold storage, effectively an offline vault for bitcoin, must be used by these organisations and make sure holdings are insured. Elliptic is a popular cold storage provider, as is Armoury.

 

What can I do with my bitcoin?

Here in the UK there is still so much apprehension within banks about holding bitcoin-touched funds that there are a limited number of businesses who are prepared to accept them.

You can do far more online. Companies such as BitPay and CoinSimple make it very straightforward for online businesses to accept bitcoin funds. Large companies such as Dell and Microsoft made headlines when they announced they were accepting the currency.

 

Is it safe?

Can you lose all your money? Yes; but find me an investment where that can’t happen. As with all investments, you should not invest what you can’t afford to lose.

Bitcoin is not regulated. Does that mean it should be avoided? Not if that same logic applies to your investments in property, gold and cash. Those assets also aren’t regulated, however the services offering you such investments very often are.

Never invest in something you don’t understand. For those unfamiliar with bitcoin and its origins, I highly recommend Dominic Frisby’s Bitcoin: the Future of Money? By understanding what makes bitcoin unique, and the different ways you can invest in it, you are inherently protecting yourself.

Jan Skoyles is former chief executive of The Real Asset Company

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