If you haven’t quite got your head around cryptocurrencies, such as Bitcoin, then you are not alone! Whilst almost no one had heard of such things ten years ago, today it is estimated that there are over five million users worldwide. Demand has pushed up the value of a Bitcoin from pennies to almost £3,000 and it is this exceptional increase, rather than the innovation itself, that is responsible for much of the increased awareness.
Wherever significant gains have been made, in any field, it is common for brokers, tipsters and scammers to jump on the back of the success to persuade new investors to participate with their hard-earned cash and as ever, the message is, proceed with extreme caution.
Bitcoin’s most important characteristic, and the thing that makes it different to conventional money, is that no single institution controls the Bitcoin network. Bitcoin is a cryptocurrency which was created in 2009, and made it possible for peer-to-peer exchange of virtual currency without requiring a bank, government or third party.
Several marketplaces known as ‘bitcoin exchanges’ allow users to purchase and sell bitcoin, coupled with bitcoin ATMs make the cryptocurrency easily accessible. Payment is possible in a variety of ways, ranging from hard cash to credit and debit cards to wire transfers, or even with other cryptocurrencies, depending on who you are buying them from and where you live.
Sending money to others requires a private key, which is issued by software known as a Bitcoin wallet. A Bitcoin wallet provides mathematical proof that transactions came from a wallet’s owner. Choose a Bitcoin wallet provider, download their app to your smartphone and then you can trade in Bitcoin.
We are now witnessing the evolution of something new – the ICO which has led to a stern warning being issued, last week by the UK financial regulator, the FCA – be prepared to lose your entire stake with any such investment.
Initial Coin Offerings (ICOs) is the practice of creating and selling virtual currencies to finance start-up companies. ICOs use publically raised funds, in a similar vein to crowdfunding, although instead of raising funds in sterling, euros or dollars, investors pay using cryptocurrencies such as bitcoin and ether. In return, they are issued with a digital token which can represent a share in the company, equity or access to the service the company is creating.
In the recent warning, the FCA identified ICOs as high risk and speculative investments, which are extremely unlikely to benefit from UK regulatory protections like the Financial Services Scheme or the Financial Ombudsman Service.
The FCA advised investors to exercise a degree of caution as ICOs are often raising funds for early-stage projects, or experimental business models making the investments riskier and particularly vulnerable to fraud.
The warning comes shortly after Chinese regulators announced a ban on fundraising through selling ICOs, and plans to ban trading of Bitcoin and other virtual currencies on domestic exchanges.
“You should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself and prepared to lose your entire stake,” the FCA reports.
The FCA is still considering the impact of digital currencies, and plans to report on its findings later this year. Until then, whether an ICO falls within the FCA regulatory boundaries or not, will be reviewed on a case by case basis.
At Lowes Financial Management, we know that over the years there have, occasionally been easy ways to make money but these are often highlighted after the fact, when they have benefited an extreme minority and they ultimately become an easy way to lose money. The evolution of cryptocurrencies is a perfect example – if you were lucky enough to get your hands on a dozen Bitcoins five years ago they may have cost you less than £100 yet, today they would be worth over £30,000. Tomorrow they could be worth a whole lot less.
Sound financial planning is not going to turn a modest investor into a millionaire but it should ensure the modest investor protects and builds on what they have.