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Is Bitcoin an appropriate investment?

Charles Stanley’s Chief Executive Officer Paul Abberley explains why investors should be extremely wary of Bitcoin

Paul Abberley

in Features


Bitcoin is in many people’s minds given its wild performance in recent months. It has made headlines for surging to giddy new heights, and for plunging rapidly shortly after. If you had bought Bitcoin for Christmas on 16 December, you would have paid $19,343. By 17 January you would already have a loss of 46%. If you had bought it a couple of months earlier you would still have a profit of 85%, if you could sell at the stated market price.  

Is Bitcoin an appropriate investment? The simple answer is no. It might or might not be a good idea to buy Bitcoin and it could conceivably increase further in value, but it is no more an investment than a wager on the 2.30pm race at Ascot. Accordingly, we will not buy Bitcoin on behalf of client portfolios.

Investments are grouped into asset classes. Asset classes must have either or both of two characteristics:

·         They provide a systematic return over time

·         They provide a safe store of value for savings

Systematic returns give the expectation of positive returns, either from income or capital appreciation over time. Naturally, this expectation is not always fulfilled. We all know that investments can go both up and down in value. But a return can be expected. Both equities and bonds offer a positive income stream and in the case of the former, the prospect of long term capital gains as the underlying company prospers. Funds containing such assets also pass this test. The same can also be said for cash deposits. These certainly offer an income stream, albeit extremely low in recent times. How about bank notes? Strictly speaking they fail the returns test: a bank note attracts no interest. Indeed, some have argued on this basis that currency is not a proper asset class.

But currencies pass the second test; they are a store of value. UK banknotes still carry the promise to “pay the bearer on demand”. They carry a UK state guarantee. Bonds carry a claim on the issuer and are thus a store of value. Equity investors own the underlying company. These are properly considered investments, because they are a reasonably reliable place to store savings. Bitcoin does not offer a store of value as they carry no claim on any underlying entity. They are an entirely digital invention which can be easily replicated.

In defence of Bitcoin, they and their like are an emerging medium of exchange and some would say are very well suited to this task in a global digitised economy. So they do have a legitimate purpose. But offering no store of value or prospect of systematic return, buying them for any other reason than as a medium of exchange is pure speculation.

This is not so much an investment as a gamble, informed or otherwise.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. If you are unsure of the suitability of your investment please seek professional advice.

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