How does bitcoin fit with your investment portfolio?

At Sharesies, customers regularly ask if we'll make bitcoin or other cryptocurrencies (crypto) available on our platform.

It's easy to see why. Since its 2011 introduction, bitcoin has gone from being worth cents per 'coin' to an all-time high of nearly US$20,000 ($27,300). It is an exciting technology that has the opportunity to change how financial services work and it's putting people investing money in it on a bit of a wild ride.

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Where does this fit in an investment portfolio?

At this stage, we consider bitcoin and other cryptocurrencies as a speculative investment. Even for speculation, they're closer to gambling than usual investing. Anyone buying into crypto today is well advised to do so with disposable funds or 'play money'—money you can afford to lose.

As with all speculative investing, instead of asking yourself "am I happy with 100 percent returns?" ask how you'd feel about a 100 percent loss. And use that to guide how much you're comfortable to invest.

Keeping a close eye on it

That said, we regularly chat crypto in the Sharesies office. Several of us have cryptocurrency portfolios and we have an in-depth understanding of the blockchain technology upon which cryptocurrencies are based. There are good reasons to believe that blockchain technology will have a tremendous impact on the future of the finance industry.

The value of bitcoin and other cryptocurrencies reflects a deep consumer frustration with existing financial services. Faced with slow transfer times, large fees and inflexible products, technical innovators see blockchain technology as a way to bring finance into the digital age.

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This isn't the first time we've seen this pattern. Great services such as Netflix, Spotify and Apple Music were made possible by the invention of peer-to-peer file sharing, a technology that gave modern streaming platforms the leverage to bring publishers to the table, increasing convenience and reducing costs for consumers.

It took time for download and streaming services to mature (and for law and contracts to catch up), and we will likely see the same thing with crypto—even the most mature components such as bitcoin itself are still evolving (and volatile) compared with traditional currency and more advanced technologies, such as smart contracts, are very experimental.

Risk and reward

On top of the experimental nature of the technology itself, the potential for huge rewards mixed with risk and a lack of regulation has created a Wild West where fraud is very common and participants routinely and irrecoverably lose enormous sums of money by mistake or foul play. Much like the change to the way we consume our media, it will take time for regulators and trust to come to crypto.

One point to consider is that determining value is difficult. In traditional economic terms, something is valuable if it has utility and if it is scarce; taking bitcoin as an example, it is indeed scarce, with a hard cap on the total number of bitcoins which can exist.

With traditional currencies, value is derived from the trust people have in the unit, backed by the Government.

Cryptos aren't backed by Government, so the value is determined solely by the market. And that market is wide open to manipulation; more and more people are entering the market with a limited understanding of the underlying fundamentals.

At Sharesies we encourage everyone to build themselves a strong financial future. While bitcoin and other blockchain technology may well be a big part of that future, at this time there is too much uncertainty and risk for it to form a big part of your portfolio.

We continue to watch and work in the space, and when the time is right we look forward to bringing our customers a good investment option in this new and fascinating platform.

Article originally appeared on NZ Herald

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