Is cryptocurrency too good to be true?

The last 12 months has seen an unprecedented surge in cryptocurrency’s stock and popularity. The digital currency, spearheaded by Bitcoin, has rocketed from a shady payment method on the Dark Web to a mainstream investment phenomenon. But what exactly are Bitcoin and other cryptocurrencies and is the hype worth it or might the bubble be about to burst?

What is cryptocurrency?

Cryptocurrency is a type of digital money that is secure and largely anonymous. It’s bound by the theory of cryptography, a form of secure communication that was borne out of necessity during WW2. Advancements in computer science and mathematical theory have since spurred the digital evolution of cryptography, prompting the use of near uncrackable code to develop cryptocurrency.

The original, and still the biggest, player in the field of cryptocurrency is Bitcoin. Launched in 2009, by mysterious programmer, Satoshi Nakamoto, Bitcoin broke the mould in terms of using decentralised technology to allow users to make secure payments and store money without using a bank, or indeed identifying themselves.

Bitcoin has become eponymous with cryptocurrency, much like Hoover did for vacuums. However, a legion of cryptocurrencies has popped up in its wake over the last decade. Major players nipping at Bitcoin’s heels include Ethereum, Ripple and Litecoin. What they all share in common is that they all run on a decentralised ledger, called blockchain, which has variously been hailed as either the next evolutionary step of the internet or a system in which nefarious activity is rife.

Cryptocurrency units are created through a process known as digital currency mining, which involves using computers to solve complicated maths problems. The subsequent 64-digit solution creates a block or unit of cryptocurrency. Investors can also buy cryptocurrencies directly from brokers, which they then store using cryptographic wallets. Mining or buying a full coin is becoming increasingly time-consuming and expensive for regular investors.

Fluctuations in Bitcoin value

By the close of 2017, there were more than 16 million Bitcoins alone in circulation. Bitcoin value peaked at a record high of £14,837 on December 18, before crashing back down to £4,350 on February 6. At the time of writing, Bitcoin had closed at £7,637. As you can see from this brief snapshot, cryptocurrency investment comes with inherent risk. As investors flock to join the bandwagon, it must be stressed that the cryptocurrency market remains extremely volatile.

With the booming trade in cryptocurrency continuing at unprecedented rates, some commentators are predicting that we are witnessing the pre-crash mania phase of an ‘asset bubble’. According to the Financial Times’ lexicon guide, an ‘asset bubble’ is: “When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely – at which point the bubble ‘bursts’.”

Cryptocurrency investment risk

EU financial services commissioner Valdis Dombrovskis recently warned that cryptocurrencies have no “guaranteed value” and require “clear and frequent” warnings to protect investors from possible risks to their investments.

Mr. Dombrovskis said: “Cryptocurrencies, which are not currencies in a traditional sense and whose value is not guaranteed, have become subject to considerable speculation. This exposes consumers and investors to substantial risk, including risks to lose their investment.

“This is why our conclusion is that warnings about those risks to consumers and investors are important and must be clear, frequent and across all jurisdictions,” he added.

Speak to Acumen today

What is clear in all of this is that, as with any investment, there is an underlying risk associated with cryptocurrency investments. Speaking to one of Acumen’s expert investment managers is the most effective means of really understanding the nature and level of risk your investments actually mean to you and your financial situation.

So, whether you would like to discuss cryptocurrency investments, or any other assets in your current or potential portfolio, make Acumen your first port of call. Our experts are on hand to provide the most up to date and effective investment advice available.

Contact us today on 0151 520 4353 or email info@acumenfinancial.co.uk to discuss your options.