If you buy cryptocurrency, are you just taking a punt on it performing well, or is it a genuine investment like buying shares and commodities?
Many people have asked that question as Bitcoin, Ethereum and other cryptocurrencies have boomed in popularity over the past few years, which has brought riches to some but financial catastrophe to others.
I’ve previously written about my experience of buying and selling Bitcoin as being more akin to gambling than investing.
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Is Bitcoin and other cryptocurrencies just gambling?
A prominent group of politicians in the UK have now called for buying crypto to be treated as gambling when considering regulation of the sector.
In their view, crypto is such a high risk sector that it is more akin to gambling than investing, while they say the currencies themselves have no underlying value and their price is purely based on what the market is prepared to pay for them.
The Treasury Committee, a group of UK MPs who hold the financial services sector to account, said in a report last week that crypto has “no intrinsic value and serves no useful social purpose and these characteristics more closely resemble gambling than a financial service.”
Our friends at MoneyWeek in the UK also reported the committee saying: “The events of 2022 have highlighted the risks posed to consumers by the crypto asset industry, large parts of which remain a wild west.”
A look at the fortunes of Bitcoin shows wild swings over the years, which have created millionaires but have also led some to lose everything.
Over the past five years, the price of a Bitcoin has swung from about $3,500 to $65,000, and as I write this, it currently sits at about $27,000.
A closer look at the charts shows in a short time, prices have plunged dramatically at times. For example, in May 2021 the price plunged from close to $60,000 to just under $35,000 in just three weeks. Of course, prices have risen at a similar speed too.
What’s more, as UK MPs have said, there is little substance to crypto other than the price others are prepared to pay for it.
When you buy shares in a company, you could argue that ultimately the same principle applies, but you at least have a myriad of factors that influence demand for that stock that are based on tangible components such as its recent performance, quality of its management team and its strategic aims.
When you buy a commodity such as gold or art, you often physically hold that item and it may bring you or a future buyer pleasure such as in the quality of the art.
Many people do not understand crypto
Then there is the fact that crypto is such a mystery to so many people, which leans into my point that it is difficult to conduct the due diligence you need to do when investing. What’s more, it’s much harder to find a financial adviser who specializes in crypto as it is with standard investments.
I got a lot of stick from crypto experts when I wrote my article on my experiences with Bitcoin, with some saying I didn’t understand what I had bought and that it is indeed a long-term investment and not a gamble.
They’re correct that I didn’t understand all the ins and outs of exactly what goes into a Bitcoin like I would a standard investment or other areas of personal finance as I have not researched it to the level I have analyzed other personal finance topics. Don’t get me wrong, I know what crypto is and how it works, but as you peel back more of the details, l I will come unstuck versus someone who works for a crypto firm.
Yet the fact I have some gaps in my knowledge, with the experience I have in personal finance, makes me question if anyone who doesn’t devote a huge amount of time to the subject will fully understand crypto to the level required to pump lots of money into it, as it is complex.
So should you buy Bitcoin or other cryptocurrencies?
In simple terms, if you know the crypto markets inside out and consider yourself an expert, then, of course, you are in a good position to decide for yourselves when and what to buy and sell.
If you don’t know the markets inside out, there is nothing wrong with investing… ahem, gambling… with crypto as long as you know the risks and can afford to lose whatever you put in.
I’m not suggesting people shy away from crypto, more that I hope my words can help them understand what exactly they are getting themselves into. Hopefully it is a venture that makes them a lot of money, but none of us have a crystal ball to know if that will be the case.