Bitcoin: a bless or a curse? - January 15, 2017

Bitcoin: a bless or a curse?

Bitcoin, the best-known cryptocurrency of the world has a rather hectic time lately. 2016 was a great year: bitcoin rallied 125% against the USD from $433 to $968. A great chunk of this rise happened only in the last months of last year. 2017 started good again, bitcoin rallied to $1140. But then things went bad: the prices fell $120 in days and it seems that after a bubble burst they stay under $900. As we can see, bitcoin is unpredictable and it can have other problems too.

Bitcoin – a non-centralized digital currency – was introduced in 2008 and it can be mined with computers or bought for other currencies. The reason behind the 57% rise we’ve seen in the last months was the latter: people started to buy bitcoin at an unusual speed. As Business Insider wrote it: “China is behind the latest bitcoin craze”. They conclude that “The increased volume in the cryptocurrency comes as money continues to rush out of China.” The yuan weakened for several reasons so Chinese investors are trying to save their money instead of keeping it in the local currency. One of the ways to do this is to buy bitcoin and Business Insider expects that the yuan’s depreciation “kicks into a higher gear” in the future.

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How can bitcoin be used? As of now, more than 100,000 merchants accept it worldwide and even bitcoin compatible ATMs can be seen on the streets. The coins can be spent basically in the regular way online and the fees are sometimes even smaller than with credit cards. All sounds great, but there are some serious issues.

First, bitcoins are widely used as a black-market currency. An even more serious problem is that there’s no refund policies when we’re paying with cryptocurrencies. Many bitcoin exchange platforms are unregulated and if go bankrupt or get hacked people can lose their money forever. What’s more, if someone steals the password of your “digital wallet” (the place where cryptocurrencies are held) money can be taken away easily. Usually these amounts are never to be found or returned. The European Banking Authority (EBA) saw the problems as serious that in 2013 they issued a warning stating the biggest threats, and they mention that they know cases when millions of dollars were lost.

Another important threat they saw was: “The value of your virtual currency can change quickly, and could even drop to zero”. We saw how fast value can drop without any signs just this year. What’s the EBA’s advice? They say that everyone who wants to use cryptocurrencies should perfectly understand the risks and “not use ‘real’ money that you cannot afford to lose”.

New cryptocurrencies can also be created every day, making deflation an even more serious problem for them. Classic assets like stocks and commodities (like oil and gold) generally have something more stable behind them, making investing in them a safer solution. Cryptocurrencies may sound great at first, but our usual advice still stands: the best way to invest money is to create a highly diversified portfolio.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving high returns on their investments.