The next Bitcoin? The risks of investing in new cryptocurrencies as investors flock to Ethereum, Dogecoin and Cardano
CRYPTOCURRENCIES have both soared in value and crashed in recent months as enthusiasts search for the next Bitcoin, but experts warn this is a risky pursuit.
Bitcoin is the biggest and best-known cryptocurrency and its rise – as well as its many drops in value – has led to investors taking risky bets on which cryptocoin could be the next big thing.
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What is a Bitcoin?
Bitcoin was launched by a mysterious creator called Satoshi Nakamoto in 2009 using computer code, with transactions saved online using technology called the blockchain.
Its value has grown amid celebrity backing and institutional interest but it is also highly volatile as it is purely based on sentiment.
Cryptocurrencies such as Bitcoin are also unregulated so there is a risk you could lose all your money and you may not be able to get funds back if you are scammed.
A single Bitcoin was worth around $23,000 last year and hit a new high of $62,000 in April.
5 risks of crypto investments
THE Financial Conduct Authority (FCA) has warned people about the risks of investing in cryptocurrencies.
- Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
- Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
- Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
- Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.
- Marketing materials: Firms may overstate the returns of products or understate the risks involved.
It was helped by Tesla founder Elon Musk announcing that his company’s electric cars could be purchased using the cryptocurrency.
The price fell back below $40,000 this week after Mr Musk reversed his decision due to environmental concerns about how much energy is used for Bitcoin mining.
China also banned banks from providing services related to cryptocurrency transactions, and warned investors against speculative crypto trading.
This shows just how risky and volatile cryptos can be as the price can sway on a weekly and even daily basis.
Why do people invest in cryptocurrencies?
There are now more than 4,000 cryptocurrencies, according to Investopedia, as creators and investors look to emulate the rise of Bitcoin.
The second largest cryptocurrency is Ethereum and its values have also hit record highs this year.
It is seen as having better technology on its blockchain to offer decentralised finance compared with Bitcoin.
A meme-inspired crypto Dogecoin, has also seen record growth this year after Mr Musk tweeted his support for the cryptocoin and amateur Reddit traders attempted to push its value up this year.
How the value of Bitcoin has changed
THE value of Bitcoin has fluctuated since it was launched in 2009.
- 2009-2011: One Bitcoin was equal to about one US dollar
- 2013: Bitcoin rises upward to $1,242
- 2014: Bitcoin falls to $530
- 2017: Bitcoin rose to $13,800 by the end of the year
- 2018: Price dropped to around $6,000 before halving again to around $3,000
- 2020: Started at $5,000 before ending the year around $28,000
- 2021 January: Bitcoin around $36,000
- February: Bitcoin around $50,000
- March: Bitcoin around $60,000
- April: Bitcoin soaring above $62,000
- May: Bitcoin tumbles to $39,790
Simon Peters, cryptoasset analyst at multi-asset investment platform eToro, which lets investors buy virtual currencies such as Bitcoin, Ethereum and Dogecoin, said: “Whilst Bitcoin and ether remain very popular with eToro investors, the crypto market is evolving quickly.
“The past six months have seen investors increasingly diversify their crypto exposure in search of the so-called ‘next bitcoin’, with a notable interest in smaller, cheaper alternatives.
“Bitcoin’s meteoric price rise has boosted demand for alternative coins with much lower dollar value, which can be purchased in full by a much wider pool of potential investors.
“As mainstream and institutional interest in crypto continues to increase, we can expect this hunt for the next big token to only intensify.”
He said one alternative is Cardano, which has the ticker ADA.
Mr Peters added: “Like Ether, ADA has a number of real-world use cases, and its blockchain is now of particular interest to developing nations.
“Just this month, it was announced that Cardano is working with the Ethiopian government on a way to use its blockchain in schools, allowing students' progress to be better tracked and permanently recorded.”
Crypto supporters highlight the technology behind virtual currencies that allow faster payments and give people access to finance where they may be less developed banking systems.
But others see it as a speculative investment and a way to make money.
There are also dedicated Telegram groups for “pumping” cryptos that encourage followers to buy a particular cryptocurrency and to post about it on social media so others will do the same and push the value up.
These are often scams.
Independent investment commentor Adrian Lowcock warns investors should consider why they want to invest in cryptos.
He said: “For too many it will be to make a quick profit or fear of missing out.
“If you have a greater interest in the technology you need to decide what you think a good crypto will look like and consider security and potential return on investment.
“It is a new area of technology and some early adopters may profit from it, but the risks are high and therefore it should be considered a speculative investment, so one to make if you are willing to lose the money."
Mr Lowcock adds that there is a risk any investment can fall to zero but with shares in companies there is greater transparency and a company has assets as well as producing something.
He said: "Many cryptos do very little and have no utility. The valuations are also high, which exaggerates the losses."
How does Bitcoin's growth compare with stockmarket investing?
Bitcoin’s value has grown by 723% over the past year and 181.2% over five years, according to data from DIY investment platform Interactive Investor.
In contrast, the next best performing asset over the past year is emerging market shares, which are up 42.3%.
Developed market shares are up 14.3% over five years.
On paper that makes Bitcoin a higher performing asset than other investments.
But a different picture emerges if you look at more recent data. Its value was down 31.4% in the first quarter of this year and has dropped 18.3% this week.
That shows how risky and unpredictable cryptocurrencies can be.
Myron Jobson, personal finance campaigner for Interactive Investor, said: “Bitcoin has a history of wild swings, but the tumult in the price of the first ever cryptocurrency over the past couple of days has left investors whipsawed.
“Bitcoin evangelists will view every fall as a buying opportunity, but for the average investor it is a timely reminder of the risk involved in investing in such a highly volatile asset.
“Volatility is part of the growing pains of the relatively new market for Bitcoin and cryptocurrencies more broadly, but the yo-yoing price of the asset is simply too much to bear for many investors. “
Mr Jobson highlights that while shares and bonds may not have as large a performance, these are at least regulated so your money is protected if the provider goes bust and it is easier to access your funds when needed.
Unlike cryptos, returns in traditional investments can also often be held tax-free in an Isa or pension and the investing costs tend to be lower.
Mr Jobson adds: “What direction the price of Bitcoin will follow is anyone’s guess, but the Bitcoin story is far from over.”
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