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Bitcoin is a subject that often divides people into fierce advocates or detractors. People usually either really believe in it as an investment, or they advise strongly against it. With cryptocurrency in the headlines every day, it makes sense to have an informed opinion on Bitcoin.
In this article, we explore the rewards and risks for investors – suggesting ways to benefit from the former and mitigate the latter. We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:
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Defining Bitcoin
Bitcoin is a type of digital currency with no central bank, like the Bank of England (BoE), and can be used as a form of payment between various consumers and merchants. It has no coins or physical notes, uses no intermediaries to process transactions and payments (and transfers) are verified using the “blockchain”. This is a public ledger (unlike a bank, which uses its own for transactions) and network nodes – or “miners” – around the world participate via cryptography, often getting rewarded for doing so in the form of payment using the cryptocurrency.
Since its creation in 2009 by Satoshi Nakamoto, Bitcoin has attracted investors’ attention as a potential store of value. The basic idea is to buy some, wait for the market price to rise and then sell for a profit. Yet few investments have been as polarising as Bitcoin. In 2013, Forbes named it the best investment of the year – but in 2014, Bloomberg ranked it as one of the worst. Let’s look further at the arguments from both sides.
Pros & cons of Bitcoin
For investors, the first aspect of Bitcoin to consider is its volatility. On 24th May 2021, its annual 30-day volatility reached 116.62%. For some, this makes Bitcoin highly dangerous for a portfolio – but for others, this could offer some opportunities to generate big returns when the price drops. Here, the key is to make sure you are comfortable with the investment risk before committing any significant capital Bitcoin.
The most notable benefit of Bitcoin is its potential to generate huge returns. Since the price went down by half in May 2020, for instance, the cryptocurrency has risen by 300%. Yet the reverse can also be true – if you invest all your money into Bitcoin, then you could lose everything. This is partly because there is now fierce competition, with over 6,000 cryptocurrencies currently in existence. Most of these are practically worthless. Yet there is also the risk of hacking, which is higher for crypto exchanges compared to stock exchanges. In August 2021, nearly $100m was stolen from Liquid Global – a Japanese cryptocurrency exchange. A week before that, hackers took $600m from the Poly Network platform.
Chase reward whilst reducing the risk
Given Bitcoin’s high volatility, it would be unwise for most investors to place the majority of their net worth into it. Yet it could be a great part of a portfolio – with some risk mitigation measures in place. One simple, effective strategy to ensure proper diversification. If Bitcoin makes up, say, 1% of your portfolio and it crashes to 0%, then your other investments could still put you in profit for the whole year if they perform well.
Another strategy is to set a stop-loss order for your Bitcoin investment(s), which leads to an immediate sell if the price falls under a certain value. This can help you recover at least some of your losses. An even better strategy could be making a trailing stop-loss. This adjusts the stop price at a fixed percent below the market price of Bitcoin, allowing you to still capture most of your gains if the price suddenly plummets.
These ideas can help when investing directly into Bitcoin. However, other ways to profit from the cryptocurrency – whilst mitigating your risk – include investing in Bitcoin mining companies, and other businesses with exposure to demand for Bitcoin. Here, you can invest in individual stocks or in blockchain ETFs (exchange-traded funds), which spread your money out across multiple company investments. The benefit of this approach is that investors can look at the cashflows, balance sheets and income statements of each company and determine the risk/reward balance using valuation models – such as Discounted Free Cashflow (DFC). It might also be the case that many of these companies are not wholly dependent on Bitcoin, or could shift their business model to another cryptocurrency if the price plummeted. This provides you with a good margin of safety and gives your investment a better chance of recovering later.
Invitation
Bitcoin is still very relevant and attractive to many investors in 2021, particularly as people are nervous about governments engaging in “money printing” with fiat currencies to try and navigate the COVID-19 recovery. However, it does have its risks and it is important to address these if you are considering including cryptocurrency investments in your portfolio.
Interested in finding out more about the exciting investments we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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