In a climate of economic uncertainty and low interest rates, some investors may be inclined to look at alternative forms of investment, in a bid to maximise their returns. With much hype around DIY stock trading and cryptocurrencies these may be perceived as good options for short term gain. But the Financial Conduct Authority (FCA) has warned investors in cryptocurrencies like Bitcoin to “ensure they understand and can bear the risks involved with assets that have no intrinsic value”.
With a single Bitcoin standing you in at around £10,000 today and having grown to that level in less than 5 years, hitting a high of nearly £15k in December 2017, the rapid rate of growth could be attractive. But the City regulator has stressed that the majority of cryptocurrency investing is unregulated and would not be covered by the Financial Services Compensation Scheme, which pays out if certain types of investment collapse.
Just like any other commodity, the value of cryptocurrency is based on supply and demand and with an average of just 1,800 Bitcoin hitting the global market each day, the value remains high as demand outpaces supply. Furthermore, the process and cost of mining Bitcoin has also grown exponentially, with early Bitcoin being mined on simple shop brought laptops but current production requiring mass server farms with power consumption greater than that of some developed nations like Ireland and Austria.
Despite some major companies like Expedia, Microsoft and Subway accepting Bitcoin and others accepting its competitors, the lack of regulation and control is still the biggest risk associated with cryptocurrency. The production of cryptocurrency is global, decentralised and under the control of no one single Government and as a result is has been likened to the ‘Wild West’. The Bitcoin crash in 2018 was reminiscent of the dotcom bubble in 2000 where hype outstripped the intrinsic value of the asset.
Whilst many banks and major software companies are working on the technology required to manage and control Bitcoin and other cryptocurrencies, as they do traditional currencies; we are still some way from them becoming mainstream and therefore subject to the sort of regulation that would allow the FCA to change its advice to investors.