Darren Fell – managing director of Crunch, the UK’s fastest growing accountancy – explores the possibility of investing in bitcoin.
What is this controversial new technology, why has it increased in price so drastically, and is investing really worth the risk?
The two main qualities that make a successful entrepreneur are the ability to spot exciting new trends and, after some solid research, to have the confidence to invest one’s own time and money into pursuing these ideas.
Bitcoin is all over financial news at the moment. Whether it’s multi-billion dollar drugs busts, huge bankruptcies, or high speed car chases through the streets of LA, there’s no doubt that this new technology is causing quite a stir.
So what exactly is bitcoin, how do you invest in it and what are the risks involved?
Although it’s true that bitcoin is a currency, that’s only part of the picture – a bit like saying that a computer is a word processor. The real genius behind bitcoin is that it’s a whole new kind of protocol, capable of hosting any number of financial products.
Bitcoin evangelists have suggested that the protocol could one day be used to automate financial services like accounting, banking and stock exchanges.
These possibilities go beyond the idea of bitcoin just being a currency and are, I think, the real reason why the price has risen so much over the last 18 months. Worth just £7.50 at the start of 2013, its price peaked in November at £750 a coin, making a 1,000% increase in value in just 11 months.
That’s a big enough margin to excite anyone in finance, but is bitcoin worth the risk?
Bitcoin is designed to mimic the way that precious materials are mined – as the prize becomes more scarce, one must invest more in the search, inherently pushing up the value.
In other words, it’s programed to increase in value over time. This obviously sounds great, but it’s not as simple as that. The last bitcoin will be created in the year 2140, meaning that although there is deflationary pressure, you’ll not necessarily be guaranteed gains, even in the long term.
Also, because bitcoin is decentralised, its price is completely dependent on the whims of the free market. The fact is that there’s nothing stopping bitcoin from losing all its value overnight. As long as people sell their bitcoins for traditional currency, the price will keep dropping. Likewise, however, there’s technically nothing but selling pressure stopping the price from exploding.
Another consideration to make is that bitcoin is frequently targeted by hackers. The most notable example is the fall of Mt. Gox, which was the world’s first and formerly biggest bitcoin exchange. The site allegedly faced 150,000 hacks every second and this eventually drove the company into the ground.
The nail in the coffin was when the owners discovered that 744,000 of their customers’ bitcoins had been stolen by hackers. The company filed for bankruptcy in February and cited debts of around £38m.
For the more cautious among you, it might therefore be a better idea to invest in one of the many up-and-coming bitcoin startups. One of the biggest players at the moment is BitPay – a payment services provider that recently attracted $30 million from investors, including huge names like Richard Branson and PayPal founder, Peter Thiel.
This gives you the potential large gains inherent in the bitcoin market, but whilst maintaining traditional safeguards. I don’t have to warn you, I’m sure, that on balance it’s still a very risky move.
Darren Fell is a serial tech entrepreneur and currently managing director of Crunch Accounting.