Bitcoin – a smart investment or a bloody big hoax? [1 of 3]
By Mark Copsey, Partner
The price of Bitcoin has surged an astounding 400% in the past six months, and I have been getting more calls from clients who want to know whether or not to invest.
At this stage, I believe that the upside could potentially be huge, but conditions could shift very easily and quickly as the market and global regulations evolve. Suffice to say, Bitcoin is not an investment for the faint-hearted.
I have invested a small portion of my portfolio in Bitcoin and intend to hold for the long term. I’ll explain why, but first, let’s start with the basics.
What is Bitcoin and how is it created?
Bitcoin is a cryptocurrency, which is a digital cash system that is managed not by governments or banks, but by a decentralised network of high-powered computers around the world. Coins are created through a process called mining — much like mining for gold, but with software instead of a pickaxe.
By design, there will only ever be 21 million Bitcoins available for mining. At the time of writing approximately 18.6 million Bitcoins have already been mined, leaving less than 3 million still to be unlocked. Mining for Bitcoin is designed to become more difficult over time, so most investors these days have to buy and sell them on cryptocurrency exchanges online.
Transactions are recorded on what is known as the “blockchain”: an enormous, encrypted digital ledger that is stored and verified by many machines around the world that choose to run Bitcoin software. These machines act as “nodes” that constantly check the integrity of the blockchain. This decentralised design makes it effectively impossible for someone to maliciously alter the blockchain and arguably makes it far more secure than any other currency.
The price of Bitcoin has been extremely volatile, with 1 Bitcoin costing anywhere between AUD$63,000 and AUD$83,000 in the past month. Each Bitcoin is broken down into 100 million (100,000,000) satoshis, just as dollars are broken down into cents. As more people start using Bitcoin for real-world purchases, their day-to-day transactions will likely be in satoshis — with the notable exception of Tesla cars, which can already be purchased using the cryptocurrency.
So is Bitcoin a commodity like gold or a currency like cash?
Right now, Bitcoin investors seem to be using it as a store of value like gold, which partially explains its meteoric rise in recent months, amid global fears of inflation.
But as Bitcoin becomes mainstream, more suppliers are likely to accept it as a payment for goods and it will become more like a currency. This is now starting to happen with high-profile companies like Tesla and Microsoft accepting Bitcoin as payment in the US.
This is where I see the huge potential for growth in the long term. Because only a finite number of Bitcoins will ever be mined, each could be worth a huge amount if Bitcoin (and satoshis) become the currency of the future. But let’s not get ahead of ourselves.
Is it safe?
In Bitcoin’s early years, in the late 2000s and early 2010s, there were concerns that it could be hacked; that it was being used by criminals on the Dark Web; or that governments would look to shut it down.
From what I’ve read, no one has ever come close to tampering with the Blockchain (the ledger on which all Bitcoin transactions are recorded). In fact, blockchain technology has proven to be so secure that three of Australia’s big four banks are now using it to digitise bank guarantees. I recommend listening to this Investors Podcast if you want to know more.
Similarly, I don’t see the potential use of Bitcoins by criminals as a concern. Criminals use cash too, after all. And while it may be happening with Bitcoin, only a tiny portion of coins in circulation could realistically be in criminal hands — certainly not enough to be a legitimate reason for government intervention. I listened to a fascinating podcast recently with Katie Haun on the Dark Web, Gangs, Investigating Bitcoin, and The New Magic of “Nifties” (NFTs), in which she talked about her years in the FBI and the fact they were able to track down two rogue FBI agents using the technology in which Bitcoin operates.
My experience as a Bitcoin investor
I’m a relatively recent convert to Bitcoin. As I have already explained, I believe it could be the currency of the future and if so, the upside potential is enormous. At the time of writing (22 April), my investment is up 18.52% from when I bought in early February. That said, it has been an exceptionally wild ride in between with the portfolio moving 20%-30% in both directions in that period.
Personally, I’m in this for the long haul and do not intend to trade in and out of positions simply because the swings in price are so huge. I’ve gone in with eyes wide open and hope to make a killing. But at the same time, I accept I could lose the lot. If you can’t bear the thought of this, I suspect Bitcoin is not for you.
Next time I’ll talk more about Blockchain and then NFTs. These are both very exciting and are definitely here to stay.
If you would like to discuss this further please feel free to contact me on mtcopsey@allworths.com.au or 02 9264 6733.
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