Bitcoin – a worthy investment?

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“All I ever seem to hear about these days is Bitcoin.”

Someone said this to me the other day and I had to agree. Particularly in Japan, after Bitcoin was recognised as a legal payment method 3 months ago, resulting in a huge spike in trading, not to mention in price. So, if you’re sick of hearing about Bitcoin I apologise, but it’s hard to ignore it when discussing money and investments these days.

The purpose of this post is to consider Bitcoin, or other cryptocurrency, from a longer term investment perspective. Firstly, cryptocurrency is obviously a satellite holding. If you don’t understand what I mean by that, you may want to check out this post on Core vs Satellite.

As by far the dominant digital currency, there is incredible potential for Bitcoin technology to compete with existing infrastructure such as:

  • $2 trillion annual market for electronic payments
  • $1 trillion annual e-commerce market
  • $514 billion annual remittance market
  • $7 trillion gold market
  • $4.5 trillion cash market
  • $16.7 trillion offshore deposit market

There are also some significant risks associated with Bitcoin. The four most prominent being:

  • a better digital currency emerging and stealing the market lead
  • an undetected bug in the system
  • a hard fork (when some nodes in the network upgrade to software that is incompatible with previous versions) causing the Bitcoin payment network to split in two
  • a sustained attack by an organisation with substantial financial resources (e.g. a government)

Bitcoin enthusiasts have rebuttals for each of these risks, but they have to be taken seriously. That said, there is no sign of Bitcoin going away any time soon. If you think the potential upside is worth the risk, here are some simple investment guidelines:

  • Start with Bitcoin rather than other, less prominent cryptocurrencies
  • Don’t invest more than you can afford to lose. 1-2% of your total assets is a good guide.
  • Expect volatility – even people used to stock market volatility will find this a rollercoaster. Don’t invest if it’s going to prevent you sleeping at night.
  • Plan to hold for the long term
  • Consider dollar cost averaging to begin with
  • Study up on how to store your Bitcoins safely – don’t leave them sitting on an exchange

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