Bitcoin ban and volatility brings fresh investment warnings

22 May 2021

Bitcoin prices plummeting to a three-month low, serves as another warning to investors of the volatility of the digital ‘currency’ as an asset, with warnings that “the logic for investing in it is not sound”.

The fall followed an announcement from regulators in China that cryptocurrency payments would be banned.Beijing placed fresh curbs on banks, insurers and payment firms preventing them from processing transactions in digital currencies.

Bitcoin prices reacted by falling almost 30% to around $30,000 in one day. The sharp fall followed a 10% drop in prices earlier this month after Tesla founder Elon Musk announced that it would no longer accept the currency amid concerns around its carbon footprint.

Rick Ealing, investment director at Quilter, said the sharp price drop should serve as a reminder for investors to “interrogate rigorously” why they are interested in investing in Bitcoin.

According to Ealing, investors should ask themselves why they want to invest despite the higher price and whether they have evidence that even higher prices are coming.

Ealing said: “Many people have been tempted to invest purely because it has gone up in value and they have a fear of missing out. Bitcoin is a volatile asset and as we have seen so often in financial markets boom is almost always followed by bust.

“Getting rich slowly is a far more effective way of growing your money and giving stability in future life. Diversified, multi-asset portfolios will guard against violent swings in asset prices and ensure long-term objectives are achievable.

“Bitcoin will not do this and the logic for investing in it is not sound. If we say that Bitcoin is a currency, then it must get to a point of broadly stable value in order to function as a currency. Successful currencies do not have wildly fluctuating values such as this.

“The premise on which people claim Bitcoin has long term value argues against its future growth potential. Those who have made money from cryptocurrencies have much more luck than they do skill.”

However, Nigel Green, founder of deVere Group, said that volatility in the markets was “not necessarily a bad thing”.

Green said: “The so-called ‘cryptocrash’ is creating a lot of noise but volatility in the cryptocurrency market should be treated in the same way as turbulence in any other market.

“As with any type of investing, the investor’s best tool in order to sidestep potential risks and take advantage of opportunities that arise in times of market volatility, is diversification. Cryptocurrency investors should ensure they are diversified across the principal digital tokens, for example Ethereum, and as part of a wider investment portfolio of assets, sectors and regions.

“Some of the shrewdest investors have consistently utilised market volatility as major buying opportunities in traditional financial markets – and the cryptocurrency market should be no different.”

For Green, cryptocurrencies will remain a permanent feature, shaping the future of finance. However, he cautioned that investors should not be swayed by one particular voice in the market such as Elon Musk.

Green added: “Sound investment decisions are not made on hype and hysteria from one celebrity enthusiast on social media, rather time-honoured fundamentals such as diversification, sensible valuations and profitability.”

Professional Paraplanner