Just because the price of bitcoin has soared this year and you could still make a profit does not mean you should join the crowd.
Crypto, thanks to the endorsement of President-elect Trump, has been brought in from the cold and is in danger of gaining a veneer of respectability.
Hence the surge – but nothing fundamental has changed. Describing crypto as a currency is a misnomer, as it has none of the essential characteristics of money: it is not a unit of account, it is not a reliable store of value and it is not a widely accepted medium of exchange.
The current hype makes it seem as if everyone is a winner. Charities such as Gamblers Anonymous know the truth can be very different. They are dealing with increasing numbers of crypto casualties: people who have lost their life savings and ruined relationships by chasing bitcoin riches.
Perhaps it would be better named ‘betcoin’. The fact crypto has lured in problem gamblers is revealing in itself. This speaks to the buzz of betting, not the calm decision-making process with which investors should ideally approach their portfolio.
Crypto has become too big to ignore. Around seven million people in the UK, around 12 per cent of the adult population, own crypto assets, according to watchdog the Financial Conduct Authority.
Gamble: Just because the price of bitcoin has soared this year and you could still make a profit does not mean you should join the crowd
That is sobering. Many of those people may be unaware that crypto is unregulated and if they fall victim to frauds they are not covered by any UK compensation schemes.
It is also sobering to learn the most-bought share on one of the UK’s biggest investment platforms last month was MicroStrategy. This US-listed company is bitcoin on steroids – it buys up vast quantities on borrowed money, which hedge funds and others lend at zero interest in return for IOUs that convert into MicroStrategy shares.
These ‘investors’ are betting that the value of bitcoin will rise, helped by MicroStrategy’s buying sprees, and that this will send up the value of the shares. The company’s current market capitalisation is more than the supposed value of the bitcoin it owns.
The catch with leverage – using borrowed money to ramp up exposure to an asset, real or imagined – is that it amplifies gains, but it magnifies losses as well.
Students of stock market history will know that when London cabbies are suddenly crypto experts and the elderly gentleman over the road starts asking whether he should buy bitcoin for his baby grandson, it’s time to be wary. The crypto-boom is an index of disillusion with governments, conventional investments and central banks. That explains the surge, but does not justify it.
Wall Street legend Jamie Dimon, who steered JP Morgan through the financial crisis and may be the world’s most prominent crypto-sceptic, has argued there are three reasons governments will in the end clamp down.
First, because of the use of crypto to finance terrorism, second because sooner or later little old ladies will be financially ruined and thirdly because governments like to control their currencies and crypto could undermine that.
Trump claimed in the summer that Dimon had changed his tune on crypto and there were reports the President-elect was considering him for Treasury Secretary. In the event, that role went to Scott Bessent, a pro-crypto hedge fund manager.
Dimon was right all along. The bitcoin bubble will burst and the longer it continues to inflate, the more painful it will be.
DIY INVESTING PLATFORMS
AJ Bell
AJ Bell
Easy investing and ready-made portfolios
Hargreaves Lansdown
Hargreaves Lansdown
Free fund dealing and investment ideas
interactive investor
interactive investor
Flat-fee investing from £4.99 per month
Saxo
Saxo
Get £200 back in trading fees
Trading 212
Trading 212
Free dealing and no account fee
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.
This article was originally published by a www.dailymail.co.uk . Read the Original article here. .