Is cryptocurrency a good investment? – Times Money Mentor

Cryptocurrency may be a good investment if you are willing to accept it is a high risk gamble which could pay off, but also that there is a strong chance you could lose all of your money.

Prices of cryptocurrencies including bitcoin have surged in the past and plunged in 2022, so it is important that if you are planning to invest in them, you go in with your eyes open.

Cryptocurrency is an extremely high risk investment, so don’t invest unless you’re prepared to lose all the money. You’re also unlikely to be protected if something goes wrong.

In this article we explain:

Related content: Should you invest in bitcoin?

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Is it a good idea to invest in cryptocurrency?

If you invest in cryptocurrency, do it based on the facts, not the hype — and there is a lot of hype.

Before you buy and sell digital currency, know the risks so you can judge if investing in it is a good idea for you and your personal finances. Here, we help you understand how cryptocurrency works.

The Bank of England would not agree that it is a good investment. Governor Andrew Bailey warned that people who invest should be prepared to lose all of their savings.

Remember: it’s not a good idea to invest in cryptocurrency unless you’re prepared to lose all the money you invest.

This is because cryptocurrency is an extremely high risk and complex investment, and you are unlikely to be protected if something goes wrong.

We also only provide this content for educational reasons. If you’re thinking of investing in cryptocurrency or in any other investment, you might want to consider obtaining appropriate financial advice.

What are the risks of investing in cryptocurrency?

Governments and financial regulators in almost every country have warned investors of the risks posed by buying cryptocurrency.

And that the warnings have been so emphatic and widespread is partly down to the hype around digital currencies.

When an investment makes headlines for soaraway returns, is featured in advertisements or endorsed by celebrities as a way to get rich, investors can pile in without thinking through the possible consequences.

1. Volatility

Extreme volatility is a defining factor of cryptocurrency. While you may make high returns, you could also lose everything.

2. Scams

In November 2021, around £1 million–worth of cryptocurrency scams were being reported to Santander UK by its customers each month. The scale of crypto fraud overall will be much greater.

One of the most common types is when a criminal hacks into your computer and freezes you out of your account.

3. Exaggerated promises of high returns

Cryptocurrency firms may also be overstating how much investors could receive from investing in crypto, while minimising the risks.

4. No compensation scheme

In the UK, deposits held with a bank or building society which is authorised and regulated by the Prudential Regulatory Authority are protected by the Financial Conduct Authority (FCA) are protected by the Financial Services Compensation Scheme; if, say, a bank or building society goes bust, compensation of up to £85,000 will be available to customers through the FSCS.

Crypto assets, however, are not regulated by the FCA, and so if the cryptocurrency exchange or platform where you have invested goes bust, there it is unlikely that you will get your money back.

For those wanting to get to grips with crypto investing, check out our article: Six cryptocurrency tips (and five mistakes to avoid).

“Some firms are offering investments in crypto assets that promise high returns. If consumers decide to invest, they should be prepared to lose all their money.”

Financial Conduct Authority, In January 2021

Is cryptocurrency a good way to make money?

Early investors in cryptocurrencies such as bitcoin will probably have made money. If you had spent £310 to buy one bitcoin in April 2016, six years later your investment would have been worth about £24,000. Past performance is not an indicator of future results.

Bitcoin’s price soared through 2021, reaching record highs of $69,000 in November. But the price of bitcoin has been falling in 2022 amid a wider cryptocurrency sell-off as investors steer clear or riskier investments at a time of rising inflation and interest rates.

The price of a single bitcoin fell below $20,000 (£17,250) in June 2022 and has loitered around that level since then. As of March 2023, it sits at around $22,400, or £18,620.

While that £18,620 value for one bitcoin is far more than its price of £310 in April 2016, the price fluctuations for even the most popular cryptocurrency highlight the extreme volatility of crypto investment.

Some new cryptocurrencies are intended to replace traditional currencies such as pounds or dollars. Others are used to create new types of financial application, or swap value between various digital currencies.

If you are considering buying into digital assets, look closely at projects individually to see how they might pan out in the future. Investing in cryptocurrency is extremely risky and you should only invest what you can afford to lose.

Are you buying a totally worthless digital coin or something that offers innovative solutions to existing financial problems? If you are new to digital assets, read our article on cryptocurrency trading for beginners.

What are average returns for cryptocurrencies?

There is no guarantee a cryptocurrency will remain in action in the long run.

For example, of the top ten cryptocurrencies by market value in 2013, only seven are still functioning today.

In 2013, one bitcoin was worth just under $112, and the currency had a total market value – all the bitcoins in circulation multiplied by the price of each one – of just over $1.2bn.

On 16 May 2022, one bitcoin was worth about $30,000 and had a total market value of $1.3 trillion.

Eight years ago, one litecoin was worth $3.38. In April 2021, it commanded a value of about $245 per coin. Now it is worth about $60.

Devcoin, novacoin and CHNCoin are no longer listed by the price-tracking website CoinMarketCap, while freicoin and terracoin have fallen in value and the latter is worth a fraction what it was in 2013.

There is a constant stream of new cryptocurrencies entering the market. Dogecoin is just one recent example: it took off in May 2021 but has struggled to sustain investor momentum.

Is ethereum a good investment?

If the price of any asset rises rapidly, there is always a chance it could fall just as quickly. We have seen that with ethereum in 2022.

Launched in 2015, it had been on an upwards trajectory since July 2021, reaching a record high of $4,617. In late January 2022, its price had fallen to $2,411, and as of early March 2023 its value was about $1,560.

Bear in mind however that three years ago it was around $240. It is still one of the most popular cryptocurrencies largely because it has more uses beyond just being a cryptocurrency. Still, this doesn’t make it any less volatile.

Ethereum is used in smart contracts on the blockchain networks crucial to cryptocurrencies, and payments company Visa recently said it would use it to record crypto payments.

But remember there are no guarantees, so don’t put all your eggs in one basket. Check out our guide to bitcoin alternatives here.

An important point to bear in mind about investing is that you only lose money if you sell when the asset falls below the price you paid for it, as you end up crystallising your losses. Read more in our beginner’s guide to investing.

Can cryptocurrency be a good long-term investment?

Yes, according to sophisticated investors such as banks, hedge funds and pension funds.

More of them are investing in cryptocurrency than ever before, and investment banking giant JP Morgan Chase advised in February 2021 that investors could consider putting 1% of their investments into bitcoin as a way to diversify their portfolio, according to financial firm Bloomberg.

However, this investment advice is aimed at financial professionals and not your average investor who owns a few thousand pounds in stocks and shares.

Investing in crypto is fraught with serious risk.

Some early investors who have persisted have evidently made themselves rich. Those who haven’t? Well, it should be fairly clear that the value of their investments may have fallen to next to nothing.

Top tip:

• Watch what sophisticated investors are buying. Pension funds or university endowments, which manage billions of pounds in cash and specialise in long-term investments, will often only invest in bitcoin — if they invest in crypto at all.

Bitcoin is the original cryptocurrency and commands a high long-term value because it has never been hacked and has maintained 100% uptime since it was launched.

Is bitcoin a good inflation hedge?

Investment pros have been talking a lot about digital currency as a way for investors to hedge against inflation.

When inflation rises, as it is doing at the moment, the value of your cash falls. As the years pass, we can buy fewer goods and services with the money in our bank accounts.

Investment options touted as a “hedge” — government bonds or gold, for example — tend to either:

• Keep more of their value than cash over the long term
• Or they tend not to be affected by declines in other parts of the economy

The first of these potential advantages could also be applied to the stock markets – and, history suggests, to crypto assets such as bitcoin. That’s why so much long-term investment advice is focused on moving cash out of our bank accounts and into stocks and shares that could appreciate over time.

Baked into the bitcoin code is the promise that no more than 21 million units of bitcoin will ever be created. So instead of being an inflationary currency like sterling or dollars, some experts argue bitcoin is the opposite: it is deflationary, increasing in value with the passing of time.

Of course, the deflationary argument in favour of bitcoin falls down if governments decide to regulate specifically against it. India, for example, has proposed a ban on cryptocurrency trading, suggesting it will impose fines on anyone caught holding onto digital assets of any kind.

The regulatory uncertainty that surrounds bitcoin, and cryptocurrency in general, is one of the reasons so many investors discount it entirely.

On the other hand, where price movements of stocks and shares may well be influenced by the performance of the business, bitcoin has no underlying asset. This means that the movements in its price are based purely on speculation among investors about whether it will rise or fall in future.

As a result, there can be violent swings in the price of bitcoin, even in the space of 24 hours. Over the last year, high inflation and a cost of living crisis are causing people to reduce their investment risk by selling their cryptocurrency, which indicates that the value of crypto can be influenced by inflation.

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