Some mysteries are intriguing and challenging to understand. Bitcoin is one such concept which has been talked about a lot over the last 8-9 years and still the conundrum around it refuses to go away.
My clients keep asking about this avenue but frankly even I didn’t know much about it (still work in progress), so my stock answer has been to refrain from anything which you can’t understand. But as youngsters are especially attracted to cryptocurrencies, it becomes inevitable for me to not only understand it but subsequently advise others whether to invest in it or not. After all, this is what one expects from his/her advisor.
Bitcoins are easier if you are investing in it but understanding the functioning of how the blockchain works, how blocks are created and validated etc are very complex. But as a simple investment, it is as simple to transact as you do in shares and mutual funds.
Whether to invest in Bitcoin or Not?
Whatever I learnt so far about bitcoin, I will refrain from investing till I find more compelling reasons or belief to invest in it. Here are some of the issues with cryptocurrencies-
1) Since the very purpose of creating crypto currencies is to keep the regulators away from the system, regulating it seems utterly difficult. It is outside the purview of central banks and the governments and operates through the peer-to-peer connections and complex validation of every transaction.
2) Since there are no regulators to regulate this, there are always the possibilities of illegal or unethical transactions taking place.
3) Though the system is well encrypted (that’s why the term cryptocurrency), there may be some computing power which could result in hacking and online fraud.
4) As there is no centralised regulator, to whom can you approach if something goes wrong?
5) There is only a limited number of Bitcoins to be mined. A total of 21 million bitcoins to be mined altogether. The last bitcoin is expected to be mined by 2140 which is a long way off still it has implications as to how the mining or block validation will take place after that?
6) All the cryptocurrencies are competing with each other, what will be the future impact on each currency?
7) Mining (process of blockchain validation) takes very powerful computing power coupled with a huge amount of electricity. The annual electricity consumption in the bitcoin network of computers is more than twice that of Ireland. This is a heavy toll on the environment. Isn’t it?
8) Above all, the cryptocurrencies are very volatile. We have seen the jump of 80% and fall of 50% in a single day. Such volatility is not for my stomach.
There are various pros of investing in Crypto but the risks at the moment outweigh the advantages. Moreover, I personally feel simple investments like mutual funds are perfectly suitable for my financial goals. So why experiment?
Manoj Pandey
CFP
