Bitcoin celebrated its tenth anniversary earlier this year and investors remain strangely positive about the cryptocurrency’s future. I have written in the past about my concerns over investing in Bitcoin and the like and unfortunately was proven right as the value fell from $20,000 to just under $4000 a coin – a decline of over 80% from its high.
Yet again as we focus on the tenth anniversary, the world’s media are focusing on the positives and the tremendous amounts of money that can be made with cryptocurrencies. I prefer to look at this the other way round and show that an 80% decline from $20,000 ($16,000) is a far greater loss than an 80% appreciation from $4000 ($3200).
We see the same old stories being churned out: in May 2010, Florida-based programmer Laszlo Hanyecz bought two pizzas for 10,000 Bitcoin, valued at the time at $30. Had he kept the currency, it would have been worth more than $38 million. The facts – he didn’t keep it.
We hear of investors that they invested between $1,000 and $2,500 on most of their initial Bitcoins and sold them at $18,000. Well done, but what about the poor investors that you sold to at $18,000 and had very little chance to get rid of them before the market collapsed.
Many are predicting a boom for the cryptocurrency in the future and once again we are looking at double-digit gains on a daily basis and as much as 30% a week in some cases. I don’t think that the future is so bright and would still approach with caution, not simply because I don’t understand enough about it, although this is as good a reason as any.
As much as that is reason enough, I would also leave well alone for the following reasons:
- I believe that the market is controlled by a small number of large players
- The bid/offer spread is still very wide
- The liquidity is not as good as you would like
- Extremely volatile
- Central banks will stifle the growth of cryptocurrencies in the future
For all the above reasons I would tread with extreme caution. The media have a role to play, not fuelling unrealistic optimism in trading cryptocurrencies.
As Peter Baring was once rumoured to have said ‘It’s not particularly difficult to make money in the securities market’. He was wrong, it is! Making money out of trading cryptocurrencies is very difficult.