By: Elize Botha, Managing Director of Old Mutual Unit Trusts
All aboard the Bitcoin train? Know your investment goals first
The price of Bitcoin once again took a dive early this week after rising to an all-time high of $7,598 this weekend. This follows the previous price rollercoaster taken by the cryptocurrency in September, which was fuelled largely by increased scrutiny from regulators. While it may be tempting, given the latest headlines, to buy into the evolving cryptocurrency hype, Elize Botha, Managing Director of Old Mutual Unit Trusts, questions whether some investors – particularly those who don’t have all the facts – may be getting ahead of themselves.
“It is important to remember that Bitcoin only dates back to 2009, making it a very young and enigmatic asset class. New asset classes of this nature, regardless of their potential for speculative short-term return, are inherently volatile and carry a high degree of investment risk – the dot-com bubble during the 1990s comes to mind in this respect.”
A significant portion of the risk associated with Bitcoin is as a result of the largely uncertain standpoint being taken by lawmakers and regulators, says Botha. “The legality of Bitcoin, and any other cryptocurrencies for that matter, varies from country to country, and it appears that regulators worldwide are struggling to control the exponential growth of Bitcoin, being a cryptocurrency that cannot be tied to any specific nation or economy.
As a result, an increasing number of countries have begun to tighten their cryptocurrency regulations, with some going as far as to ban the trading of Bitcoin and other virtual currencies altogether. Chinese regulators, for example, banned cryptocurrency exchanges and initial coin offerings (ICOs) two months ago, contributing to a sudden drop in price being experienced.”
Botha says that the high level of uncertainty surrounding the explosive growth of Bitcoin highlights, the benefits of sticking to a sound investment strategy and not necessarily buying into the latest hype, just because of the record-breaking high returns. “While these new riskier asset classes can be an exciting additional component to an investment portfolio, investors should consider their prospect of long-term financial stability before making a hasty decision.
It is therefore essential that investors – especially those who may be nearing or in retirement – utilise an investment solution that has been proven to achieve financial objectives. Unit trusts are therefore often utilised in this respect, as they are a flexible investment option which allows access to a variety of investment options, including equity, bond and property funds.”
Botha concludes that whether it be through the allocation to a new asset class or via a well-trusted wealth creation solution such as unit trusts, whatever decision an investor decides to make should be an informed one. “While the future of Bitcoin remains indefinite for the most part, your future should not be. If there is anything that you feel unsure about, you should speak to a financial adviser to ensure that you have all the information necessary to make an informed investment decision.”