Make money investing in bitcoin

Should you invest in bitcoin?

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Digital currencies like bitcoin, ethereum, and dubaicoin might be all the rage right now but are they wise asset group to invest your money in?

In this article we explain:

• What is bitcoin and how it works
• What are the other cryptocurrencies to watch out for
• What you need to think about before investing your money

Bitcoin and El Salvador

El Salvador is the first country to adopt bitcoin as legal tender.

This means Salvadorons could use bitcoin alongside the US dollar as an official form of payment.

Speaking at a bitcoin conference, president Nayib Bukele said bitcoin would make it easier for citizens working abroad to send money back home.

The announcement gave bitcoin a slight boost, though it is still almost half the price of its April peak.

The ups and downs of bitcoin

Its hailed by fans as a market-disrupting liberation and demonised by many personal finance experts as a dangerous creation. One things for sure is that bitcoin is volatile.

Since December 2020, bitcoin has enjoyed a theatre of dramatic ups and downs:

• 16 December 2020 – Price hits $20,000 per coin for the first time
• 3January 2021 – Value rises almost $5,000 in the first few days of the year to above $34,000
• 9 February – New record high of $48,000 after electric-car maker Tesla buys $1.5bn of bitcoin
• 21 February – Price hits $58,354
• 23 February – Falls to $44,845.72, falling 18.4% in a day
• 13March – New record of $61,701
• 17March – Morgan Stanley becomes the first big US bank to offer wealthier clients access to bitcoin funds – albeit restricted to no more than 2.5% of an investor’s total net worth
• 24 March – Tesla boss Elon Musk tweets that Tesla cars can be bought with bitcoin
• 13 April – New high of $63,375
• 18 April – Posts its biggest one day drop in two months, falling 25% to $55,000
• 23 April – Down to $49,730
• 10 May – Climbs to more than $59,300
• 12 May – Elon Musk says he’s worried about environmental impact of crypto, causing it to plummet to $49,000
• 23 May – slides down to $31,000
• 7 June – picks up to almost $37,000

Will the price of bitcoin go back up?

Following it’s fall in mid April, the price of bitcoin had an equally dramatic increase on 26 April – rising almost 10% in 12 hours.

• Extreme volatility is perhaps the most defining factor of the cryptocurrency market

Other cryptocurrencies are experiencing similar swings, although the falls have not been as sharp as bitcoin. Ethereum (ether), for example, gained more than 8% in the 24 hour period to 26 April and up just over 10% over the previous seven days.

What is bitcoin and how does it work?

The concept of digital monies that people send online is not that complicated in itself — after all, transferring money from one online bank account to another is doing exactly that.

• Cryptocurrencies, like bitcoin, are a form of payment that uses blockchain technology to send data in cyberspace
• Each bitcoin must be mined via computational means
• It is finite – only 21 million bitcoins that can be mined in total
• Cryptocurrencies are “decentralised” meaning they are not regulated by a financial authority, like a government or central banks

PROS: cryptocurrencies are global, meaning they have the same value in every country and so no exchange rates.

CONS: Cryptocurrencies are extremely volatility and therefore a very risky investment. People have also reported having to wait to get their cash out because of technical snarl-ups.

Why is China cracking down on crypto?

Trading crypto-currency in China has been illegal since 2019, in what Beijing says is an attempt to stop money-laundering, however it people could still trade it online.

Banks and payment firms have been banned from providing crypto-currency transaction services. On May 18 three state-backed organisations announced there would be no protection for consumers if they lost any money from crypto trading.

Now China is targeting cryptocurrency mining, suspending operations of major players. This has impacted on the value of the likes of Bitcoin, Dogecoin, Ethereum, and Binance Coin.

Why is bitcoin bad for the environment?

The digital currency uses as much power as the Netherlands every year, with just 30 countries using more energy, according to researchers from the University of Cambridge.

Computers that mine bitcoin use up to 1% of the world’s electricity supply.

While some of bitcoin’s consumption is renewable (an estimated 39%), fossil fuels are still being used to power the mining and servicing of the digital currency.

This is why electric car manufacturer Tesla has stopped accepting crypto payments, causing bitcoin to fall.

Will bitcoin recover?

There are no guarantees when it comes to investing, but as quickly as bitcoin falls, it can just as rapidly climb again.

With environmental concerns now becoming a bigger priority, and the crackdown in China – as well as concerns of central banks across the world – it’s possible the gains will be more muted. But no one has a crystal ball so it’s impossible to say for sure.

“Given the huge volatility and that the use case of crypto currencies is far from proven, traders should only dabble with money they can afford to lose.’’

Susannah Streeter
Senior Investment and Markets Analyst, Hargreaves Lansdown

What crypto to buy in 2021

One cryptocurrency that has gained a huge following since its launch in 2015 is ethereum (known as ETH).

It has a total value of around £168bn, making it the second-largest cryptocurrency.

Ethereum isn’t just a currency either because it is used in smart contracts, which allow transactions to be carried out when certain conditions have been met. Payments giant Visa has said it will start using ethereum as a way of recording cryptocurrency transactions.

The price of ethereum has increased from £149 to £2,446 over the past year.

The new cryptocurrencies on the block are dogecoin and dubaicoin. Bear in mind that neither of these are widely used and because they are so new, the risks could be higher.

Dubaicoin surged in value when a press release claimed it was Dubai’s official digital currency. But Dubai’s government has denied this and warned that the website promoting the coin was an “an elaborate phishing scam”.

SafeMoon is another new cryptocurrency that aims to cut out the banks with the use of financial tokens (we explain more later on in this article).

Bitcoin is the most famous crypto-currency but it’s not the only one

Which are the three biggest cryptocurrencies?

Bitcoin, the best-known and first major cryptocurrency, launched in 2009 and remains the market leader. Its market capitalisation — effectively its total worth — is $1.017bn, as at April 28 2021.

Ethereum and Binance come in second and third, with respective market caps of $302bn and $85.5bn.

Since 2009, a wide range of challenger cryptocurrencies, dubbed altcoins, have arrived on the scene to try to rival bitcoin.

You might also have heard of Ripple ($61.7bn), Tether ($50bn) and Dogecoin ($37.9bn).

What are the new cryptocurrencies to watch?

New, smaller cryptocurrencies include:

• litecoin
• bitcoin cash
• SafeMoon
• EOS

Caution: Smaller altcoins are even more volatile than bitcoin

If anything, they are really just speculative investments. If you are tempted, experts say to only invest a small amount of your money: 5% or less.

Should I invest in SafeMoon?

Launched less than a month ago, SafeMoon has already experienced a fair degree of volatility.

• In the week of 19 April 2021, its value fell 50 percent within 24 hours, from $0.00000944 to $0.00000216.

The following week, the value had risen to $0.000005659.

SafeMoon rewards investors by hitting sellers with a 10% fee and redistributing 5% of that amount to those who kept their investment.

As with all new altcoins, experts are warning investors to tread carefully, especially as not much is known about the new coin on the block.

What is Britcoin?

No that is not a typo! A number of central banks are looking at whether to set up their own digital currencies, with China the front-runner.

On 26 April 2021, Chancellor Rishi Sunak telling the Bank of England (BoE) to look into the case for a new central bank-backed digital currency – or “Britcoin”.

A digital version of sterling back by the BoE could allow businesses and consumers to sidestep lenders in the financial system by holding accounts directly with the bank:

• Increase access to central bank funds, currently only available to commercial banks
• Payments process could be made quicker, home and abroad
• Reduce risks associated with financial stability seen with other cryptocurrencies

A new Britcoin would not replace physical cash or existing bank accounts, according to the BoE.

How has the bitcoin price performed?

Bitcoin has had a bumpy ride but the trajectory is generally up since September 2020. The rise was fuelled by:

• demand from investors
• PayPal to allow US customers to buy and sell bitcoin within its app
• Morgan Stanley offers wealthier clients (limited) access to bitcoin funds
• Tesla pledging to start accepting it as payment for its vehicles

• One bitcoin currently costs $54,522.20 as at April 28

The cryptocurrency has made steady gains before, such as at the end of 2017 – before collapsing in 2018 (see graph below, which was produced in January 2020).

In 2018, MPs called cryptocurrencies a “Wild West industry”

• If you had invested in bitcoin at the start of 2020 and sold on 31 December 2020, you would have made a 300% profit
• If you had invested in bitcoin at the start of 2018 and sold on 31 December 2018, you would have made a 73% loss

While generally speaking the value of these currencies is, like anything else, linked to supply and demand plus the number of competitors, it is often difficult to determine what exact factors influence this erratic performance.

This makes digital currency all the more high risk an asset to invest in!

How risky is investing in cryptocurrencies?

If you want to invest in crypto, ponder first whether you would buy a house in Rapid City, South Dakota. This US city, with just over 75,000 inhabitants, reportedly has some of the most unpredictable weather on earth.

Snow blizzards and summery thunderstorms occur without warning, before everything calms down again and temperatures rise dramatically the very next day.

The weather of Rapid City is an apt metaphor to describe the behaviour of bitcoin & co.

Rapid City in America has some of the craziest weather in the world – a bit like how volatile crypto prices can be

Crypto is risky and not like conventional investing in the stock market and in 2018, MPs called cryptocurrencies a “Wild West industry”.

“It is hard to see that Bitcoin has what we tend to call intrinsic value.”

Andrew Bailey, governor of the bank of england

In October 2020, Bank of England governor Andrew Bailey said he was “very nervous” about people using bitcoin for payments and previously warned that crypto investors should be prepared to “lose all their money”.

• Cryptocurrencies are unregulated by the UK watchdog – making it an even riskier investment

From January 6, 2021, the Financial Conduct Authority banned the sale of complex derivatives that speculate on cryptocurrency movements: financial services can’t offer retail customers contracts for difference, spreadbet options, futures and exchange traded notes that focus on digital currencies.

Can Bitcoin make you rich?

Some people have certainly made a lot of money investing in Bitcoin but it is not for the faint of heart. Bitcoin is at the (very) “high-risk” end of the investment spectrum.

• Price of cryptocurrencies is volatile
• You could lose money
• Not much is known about many of them
• Some can go bust
• Others could be scams
• Some people have reported problems accessing their money due to technical issues

Occasionally one may increase in value and produce a return for investors.

Mark Hipperson, chief executive of Crypto platform Ziglu, argues the case for digital coins going mainstream. “With more and more big brands such as Tesla and Starbucks accepting crypto, there now seems to be little doubt that one day soon crypto will be accepted at as many places as traditional currencies.”

“Cryptocurrencies could remain niche, become mainstream, vanish without trace or anything in between, and any investment should be considered as very high risk.”

Danny Cox, Hargreaves Lansdown

As with any investment, do your due diligence and don’t pin all your hopes on one company or one cryptocurrency: spread your money around so you spread the risk and only invest what you can afford to lose.

Invest in cryptocurrency and you need to accept bitcoin et al’s rollercoaster ride

Is there a less risky way of investing in crypto?

“Stablecoins” could be a less risky way of investing in cryptocurrency, according to Gavin Brown, associate professor in financial technology at the University of Liverpool.

“Stablecoins continue to develop and be the potential solution to the problems of volatility and credibility for cryptoassets. In contrast to cryptos, stablecoins have actual assets behind them, like regular currencies,” he says.

DAI and TUSD are two of them and are both backed with the US dollar (one coin is worth $1).

DAI is hosted on the Maker (MKR) platform, and crypto platforms can also be safer to invest in than the actual currency, he says. “Risk is therefore low but gains are very low or nil too.”

Brown points to tether, the largest stablecoin, backed by one dollar per coin, and which topped the $50 billion mark on 26 April 2021 but warns that potential investors shouldn’t necessarily see tether as the next big thing.

“In theory it won’t ever be worth more than a dollar. But it’s potentially an interesting option for any varied portfolio to include tether – it could be a slice of stability if [other] things start to suffer.”

The stablecoin has not been without controversy either – being fined by the New York Attorney General and banned from the state the year.

According to Brown, it could also be less risky to make long term investments in the companies associated with cryptocurrencies. For example, shares in:

• Facebook – planning to launch a currency called Diem (formerly Libra)
• JPMorgan – which has the digital JPM coin, equal in value to the US dollar
• Wells Fargo – which is developing a US dollar-linked stablecoin

There are also some funds and investment trusts that have exposure to cryptocurrencies, which is a less risky way of investing than buying the currencies themselves.

How to buy bitcoin

• Where can I buy cryptocurrencies?

Coinbase* and Binance are two of the world’s largest bitcoin trading platforms. They are touted as the easy and fast way for new users to purchase various cryptocurrencies such as bitcoin.

Other ways to buy include the digital currency app Ziglu and on the investment platform eToro.

Gemini, founded by the Winklevoss brothers (of Facebook fame), is a crypto exchange that allows customers to buy, sell and store cryptocurrencies. It was recently awarded an operational licence by the Financial Conduct Authority, and is regulated by the New York State Department of Financial Services.

• What are the fees?

If you want to buy bitcoin and other cryptos – and sell them again – there’ll be several fees, such as:

• transaction fees
• deposit fees
• withdrawal fees
• trading fees
• escrow fees

These usually cost a few percent of the total transaction value.

• What about a bitcoin fund?

Several companies are planning to launch bitcoin funds, though have run into difficulties with regulatory agencies so far.

The main purpose is to facilitate the investing process into crypto and make the asset class more attractive. It will still be volatile, but it could be easier to sell your investment and get your money back than investing directly.

There are a few ways to get exposure to cryptocurrency with existing investment funds. For example:

Ruffer Investment Company – an investment trust, announced in December 2020 that it had allocated 2.5% of its portfolio to bitcoin

Invesco Elwood Global Blockchain exchange traded fund – uses the Elwood Blockchain Global Equity index to track a basket of companies deemed to have the “potential to participate in the blockchain ecosystem” Its top 10 holdings include Taiwan Semiconductor Manufacturing and Samsung.

What are Bitcoin options?

On March 26, 2021, it was reported a record $6bn worth of bitcoin options contracts were set to expire later that day. In January $4bn in options contracts had expired. Experts expect these bitcoin options to dictate the price trend in the cryptocurrency over the next few months – but what are bitcoin options?

Bitcoin options are a form of financial derivative that gives you the right, but not the obligation, to buy or sell bitcoin at a set price at or before a certain date of expiry.

This set price is known as the strike price.

Unlike buying Bitcoin cryptocurrency outright, Bitcoin options enable you to take a speculative position – up or down – on the future direction of a market price.

You’d buy a call option if you believe the market price would increase.

If your prediction was correct and the market price increased above the bitcoin option’s strike price, you’d be able to buy bitcoin at the pre-specified price. How far the bitcoin price rose past the strike price, determines how much profit you’d make.

If your prediction was wrong and the price of bitcoin fell, you could let the options contract expire worthless, and only lose the premium you paid to open the trade.

Bitcoin options have been trading on cryptocurrency exchanges for a while, but were not regulated. Now, bitcoin options are being slowly introduced by some regulated institutions.

• Find out more: read about Lewis, who taught himself about cryptocurrency and made £8,500 in less than a year, and Anna, who made $16,600 in 2020

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