Bitcoin is something that a lot of people are talking about these days. It is a confusing thing for many as it is a currency in name but does exist in real terms and so it can be difficult to understand how it can work as an investment tool. However, we do hear about lots of people investing in it and doing well and therefore it can be tempting to consider investing ourselves. However, it is very important to have a really good understanding of how it works before you invest.
Risks of all Investments
Many people get confused about the difference between savings and investments and this is not surprising as they are similar but not the same. With savings, we put our money in an account and it stays there. We get paid interest on it and will always be able to get our money back (unless we are extremely unfortunate and put it into a bank that goes out of business). Many savings accounts have guarantees backed by the government so even if the bank goes bust you will get up to a certain sum of money back. This sum is an amount determined by the overseeing financial body and can change. It is worth checking what protection you get, but essentially, most savings are safe.
With investments you actually buy something with your money. In some cases, this can be a physical item such as art or antiques but often it is something that is not tangible such as a share of a company. The fact that you are buying something means that you have spent the money and the only way that you can get it back is by selling the item again. Whether you get your money back and how much you get back, will therefore depend on the demand for the item. So, if you buy a painting for a young new artist, then you might get a good deal price wise, but you could be taking a risk as their work may not rise in value as they may not become sought after. Also, art can go up and down in price depending on what is trending so you risk losing your money. This could be the case with any investment. It is often said that you need to hold onto investments for at least a decade to be sure you make money from them. This is because there are often costs to having one or it may take time for the value to go up. This is easily demonstrated by buying an investment property. If you buy a house, then you may just have to spend the cost of the house plus pay a solicitor. You will therefore need the price to rise at least the cost of the solicitor for you to break even, but you may also need to pay capital gains tax on the increase in value (as you will with any investment), an agent to sell the house for you, a solicitor and you may have to decorate or even renovate to make it saleable. There might be extra costs like this for all investments, depending on what you buy and sell.
Risks of Bitcoin Investment
With bitcoin you will find that there could be costs of holding the coins. You will need an ewallet to store your currency in and you may pay a fee for this. You may also have fees when you sell as well as capital gains tax. There are also people who lose their passwords to their wallets and find that they then cannot access their bitcoins to be able to sell them. The price of bitcoins is very volatile as well. Like any currency the value can go up and down and this is determined by demand and supply. With a foreign currency, it can be a little more predictable as it will depend on the economy of the country and some world events, however bitcoin is not tied to a country and so it can be more difficult to predict how the value might change. It is therefore a good idea to make sure that you are very aware of this before you invest.
How to Reduce Risks
There are some ways that you can reduce the risks of all investing and these can also apply to bitcoins as well. It is always the case that you should be buying when it is cheap and selling when it is expensive and then you will make a profit. Although this seems like common sense, there are people that will panic as the value drops and will sell before they sink any lower, thinking that they are cutting their losses. However, this can be detrimental if the value rises again in the future and so it is well worth trying not to do this and trusting the value will eventually go up again. Of course, there will be some investments that will never go back up in value and this is the risk you take when you buy one and so it is well worth doing lots of research first.
Follow the market and track the selling and buying price. You may be able to look at historical data rather than following it day to day and that should help you to look at the trends and to consider whether you think that the bitcoins are likely to increase in value during the time that you plan on investing your money. As mentioned earlier, you should be prepared to invest for at least a decade so track this sort of timescale. Also make sure that you only invest money that you can afford to lose. This will mean that you will not need to suddenly cash in the investments, which could risk you losing money if you have to do this at a time when the selling price is low. It also means that if you do lose some or all of the money, you will not struggle to manage your personal finances.
