As it happens, it has worked so far. If our reader’s friend had sold his flat and pumped it into the crypto-currency, he would now be three times richer. The average flat in Brighton – where our reader, and I presume his friend, live – has sold for £280,000 over the past year; if our reader managed to sell in May and switched the entire proceeds immediately into Bitcoin, he’d now be a millionaire – in US dollar terms at least, and not taking into account any fees, rental costs or lost employment income he may have incurred in the meantime.
The spectacular performance of Bitcoin this year means we are again returning to the subject this week, because as the returns shoot up, more and more people are likely to start paying attention, wondering whether to add bitcoin – or some other crypto-currency – to their portfolios. The answer is, why not – but only if you understand the risks and as a small punt to complement an otherwise sensibly diversified strategy – not literally betting the house on it, even if the potential rewards seem huge.
The problem as I see it is that while the principle of the technology is undoubtedly useful, the risks of investing in the currencies themselves are not fully understood. Just as the price of Bitcoin has exploded, so has the creation of alternative crypto-currencies, often through an unregulated fundraising called an initial coin offering – there are now well over 1,000, some of which are believed to be little more than scams.
In fact, as we explore in this week’s cover feature, starting on page 24, it’s not even entirely clear what sort of an asset crypto-currencies are, and therefore there is no real way to understand how they should be valued or how they might behave at times of market stress. Advocates of Bitcoin would suggest that moves by respectable organisations such as the CME to offer Bitcoin derivatives offset this uncertainty, and legitimise the concept. But remember that there were plenty of well-respected banks centre stage during the dot-com boom and the global fraud that was mortgage-backed securities.
And if our reader’s friend thinks Bitcoin is the new Klondike, it’s also worth remembering what actually happened during the late-19th century gold rush. Only a handful of the 100,000 people who spent good money travelling there ever found gold, and those that did inevitably lost their fortunes gambling on new finds – or just gambling. You can bet your bottom dollar that if Bitcoin had been around in the 1890s, they’d have been gambling on that, too.
