Now that bitcoin is valued at US$4,000, some Singaporeans are wondering if it’s worth investing in bitcoin. Here are some things to know first.
Bitcoin has steadily raised in value this past year and hit the US$4,000 mark last week. This has led some Singaporeans to question if bitcoin, or any other cryptocurrencies, are the “thing to get into”. After all, endowment plans look boring at 5% per annum, while Bitcoin has quadrupled its value over the year. But here are some things to know first:
What Caused the Recent Surge in Bitcoin Value?
In a word, North Korea. Due to fears of nuclear tests and possible war in the Korean peninsula, stock markets are in a panic (stock markets like to find something to panic about every few years, and they’ve decided this event is it). When there are fears of global instability – such as would be caused by the outbreak of war in Korea – investors flee to safe haven assets and alternatives. Gold and the Japanese yen are two such safe-haven assets, and gold is also at a two-year peak. One aspect of Bitcoin is that it’s often touted to be a fixed “store of value”, such as gold. The idea is that, as there’s a finite number of them (there’s an intended cap of 21 million bitcoins), their value won’t crash like fiat currencies (such as the US dollar). And, of course, Bitcoin is not tied to the fate of any one country, as no government issues it. This may add to the impression of “safety”. But this is as much a drawback as it is a benefit – as no government backs Bitcoin, that can make it hard to use as payment outside of niche markets.
Before you rush to buy it yourself, here are some key things to consider:
• It may be too late to buy bitcoin now
• Cryptocurrencies are a form of speculation
• Cryptocurrencies can be hard to spend or liquidate
It May Be Too Late to Buy Bitcoin Now
If you decide to buy bitcoin right now, after hearing about the big surge, you’d be buying high. The price of bitcoin may already have peaked (it had to happen before the news covered it, obviously), so anyone who buys right now are taking a dangerous bet.
Despite bitcoin being at its highest ever recorded value, you’re counting on it to go even higher. That outcome is based on a volatile geopolitical issue: it depends on how North Korea reacts to current tensions. If North Korea does back down – or agree to do so due to concessions – then bitcoin values (like gold and the Japanese yen) can wind down just as quickly as they spiked.
Cryptocurrencies are a Form of Speculation
As the Monetary Authority of Singapore (MAS) has warned, cryptocurrencies such as bitcoin remain a speculative investment. Bitcoin is volatile, and has gone through several spikes and crashes. When these happen, the price movements in bitcoin don’t happen in small increments. Their value follows a whipsaw pattern, and it’s not uncommon to see losses or gains happen in increments of 20 per cent or more. While big gains are possible, it’s equally possible to lose much more than you initially invested. That makes bitcoin appropriate only if you’re looking for a high-risk alternative to complement your portfolio; it’s definitely not something to stake your life savings or retirement fund on.
Cryptocurrencies Can Be Hard to Spend or Liquidate
The main worry with bitcoin – and other cryptocurrencies – is the collapse of secondary markets. If things look bad, few investors will be ready to buy (even if they are, it will be at an extortionate price). When this happens, there are few avenues to exchange your Bitcoin for cash. One of the long term issues with bitcoin has been its lack of use in mainstream markets: you can’t go ezbuy or Carousell and start buying things with it or spend it in your grocery store. This results in a situation where, if bitcoin crashes, your only solution is to (1) sell it for dirt cheap to the few people willing to buy, or (2) hold on to it and hope it recovers, risking the loss of your entire investment if it never does. In any case, this means that money committed to bitcoin is likely to stay that way. You can’t cash it out without risking a loss – so make sure you have other savings on hand before you buy into it.
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Hi dividend warrior,
First off, I have to say, your blog is motivational.
Anyway, will you consider purchasing cryptocurrencies in the near future? Do you think cryptocurrencies are just overhyped? Will we ever see a time that bitcoins etc. replacing real money in shopping etc.?
Would like to hear your thoughts :)
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