Bitcoin is the investing buzzword of the moment. Despite losing two thirds of its value since hitting an all-time high late last year, it is still around seven times higher in value now, than it was one year ago.
There are almost 1,400 different cryptocurrencies, of which Bitcoin is the largest. These digital currencies and secure trading platforms are currently independent of governments and banks, are traded directly between users, and some are being accepted by merchants around the world as a payment option (although it is far from being wide-spread and a number of large organisations have recently distanced themselves from Bitcoin and cryptocurrencies).
The interest in bitcoin has been as variable as its value - but is digital currency a genuine investment worth considering? In our view, the decision on which individual investments you use should be secondary.
As wealth advisers, we work with clients to establish an investment strategy that largely involves deciding how to split your portfolio between defensive assets (i.e. cash and fixed interest) and growth assets (i.e. Australian and international shares, property and infrastructure).
Deciding on your investment strategy is the most important investment decision to make
The investment strategy is a decision about how much risk you feel comfortable with, or need to take, in order to achieve your goals and objectives. The decision is so important because it is your investment strategy that will drive your portfolio’s performance, particularly the long-term return. Therefore, how you apportion investments affects both risk and return.
So, in examining the value of bitcoin as an investment, the important distinction to understand is that it is not so much about the risk and return of digital currency – it’s more about your short and long-term financial goals and your ability to recover if it doesn’t go to plan.
Knowing that, the key takeaways for you to consider in regards to bitcoin are:
- An investment is generally valued on its future income stream – as Bitcoin does not produce an income stream, its value is derived by investors’ perception of its future value. That makes it a speculative/high-risk investment.
- Bitcoin may produce large gains, but on the other hand your capital could be completely lost if the bubble bursts.
- Exchanges are unregulated and can be unsecure, which has led to a number of ‘scamcoins’ and cases of cryptocurrency theft.
- With ongoing talk of government and bank regulations, its future is uncertain.
We encourage investors to seek our assistance in developing an investment strategy that suits their individual circumstances, goals and objectives.
For an in-depth discussion of cryptocurrency from an accountant’s perspective (including the implications around tax), you can also read a recent article by BDO Partner, Eddie Chung.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings, etc., as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances.
The financial product advice or information in this document is of general nature only and has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision on the basis of the advice above, a prospective investor needs to consider, with or without the assistance of a professional adviser, whether the advice is appropriate in the light of their particular investment needs, objectives and financial circumstances.