I recently bought my first Bitcoin and Ethereum. Digital currencies – or crypto-currencies as they’re also known – had not really been on my radar previously, but having read up on them as part of a freelance project I was working on, I felt it was worth investing a small amount of my portfolio in them. I must admit to also feeling a curious and special pull to the crypto landscape and I could see why some people plunge money into this market without fully understanding it.
To anyone on the crest of investing in Bitcoin or Ethereum for the first time, make sure you understand the market and the technology as best you can before you commit. And to anyone yet to encounter this mystical modern world, I’ll do my best to give you a quick and honest overview of the technology and its potential as an investment asset.
Bitcoin is effectively a new way of paying for things online. It is still very early days so you can’t buy your online groceries using Bitcoin just yet, but one day, who knows? Plenty of places do now accept Bitcoin as payment – 10,000 outlets on takeaway.com, for example, careers and education site The Makers Academy, and even a handful of UK pubs, such as The White Lion in Norwich – and it’s steadily growing all the time.
Bitcoin uses blockchain technology. In very basic terms, think of blockchain as a bit like a google document, which can be shared and seen or edited by many people all at the same time, albeit on a massive scale. Using this approach, you don’t have the traditional one-to-one relationship when sending money to pay for something. This brings a lot of benefits and transactional features we’ve never experienced before, particularly around security, democracy and shared ownership.
Ethereum uses the same blockchain technology as Bitcoin but takes it to a whole other level. With Ethereum, it’s not just about currency, and paying for things online, you can build apps and software on the platform under the same philosophical approach. While Bitcoin could become a new mainstream online currency and payment method, Ethereum could create a whole new internet!
When you think of it in such grandiose terms, it’s easy to see why some brave souls are now rushing to invest in it. You could make a fortune if you can buy up Ethereum now and sell it on for a far higher price in years to come. After all, Bitcoin has already made some people very rich. Only 8 years ago you could buy Bitcoin for just a few cents – it’s now trading at around $1000. Ethereum has rocketed from around $10 to $50 in the first few months of 2017. It could reach the heights of Bitcoin and even surpass it over the next couple of years. Equally, it could all come crashing down – there has already been one major disruption to Ethereum development which has seen it split into two opposing factions.
A leap of faith
The real difficulty is that we have no precedents for a situation like this. When you look back in time it’s hard to find anything like it that has emerged as both a technology and an investment asset. It’s a great unknown. A giant leap of faith.
The potential for Ethereum is clearly enormous and personally I do believe it could very quickly revolutionise businesses and commerce in a way never seen before, but not without its many catastrophes en route. There are new money management innovations popping up all over the place – peer-to-peer lending, property crowdfunding, high-yield bonds that cut out the middle men, banking apps – the list goes on and on. That’s all very interesting, but blockchain is potentially the ultimate accelerator of all these. And also its death knell!
Consider this… We all see Airbnb as a very modern business, a new and future way of arranging accommodation and a shining example of the sharing community where we market and share things we own to reduce the cost of ownership. There are many similar examples – car sharing (BlaBlaCar), renting out your parking space or garage (JustPark), loaning out a spare room as temporary storage (StoreMates). Collectively, I call it Share-Gen – the sharing generation.
But blockchain could actually overtake and kill off many of these innovative new businesses, before they’re barely up and running. They are, after all, just another middle-man, albeit one that facilitates a marketplace in a new way, making buying and selling quick, easy and accessible to everyone.
In an advanced Ethereum world, if I want to rent my car out when I’m not using it, I won’t, in theory, need a website or service provider to manage it all for me. I can log its availability myself. Someone in my local area looking to hire a car for a day can find it online, pay digitally for the booking and receive a unique crypto key that they use to unlock the car, which then activates its use for the period of time it has been booked for. They then return it and trigger another unique crypto key to unlock the insurance deposit on their booking. Ta-dah. The middle-man is reduced even further.
Love and war
Let’s get back to investing… As I say, it’s nigh on impossible to find historic parallels to this. But personally, it reminds me a little of the gold rush era. I can foresee millions of people getting over-excited and funnelling silly money into Bitcoin and Ethereum over the next 5-10 years, not to mention various other cryptos, some of which may not even have been imagined yet. There will be digital riots galore as greed takes hold and everyone fights for a piece of it. Some will bask in their new-found wealth, many more will get badly burnt by hoaxers, fake sites, corruption and theft. And eventually we’ll settle down into a more sedate responsible online existence were crypto is the new norm.
I believe investing in digital currencies is a great opportunity but it’s also very risky. It’s an exciting and sometimes scary future to behold. As an investment it will be a crazy, volatile marketplace – again, of the like we’ve never previously witnessed. My strategy will be to invest small portions of my portfolio, holding no more than 5% at any one time, and take a predominantly long-term view with a few short-term tactical trades when the markets experience huge swings.
One thing’s for sure. Digital currencies are not going to disappear any time soon. So even if you’re not interested in them as an investment opportunity, it’s worthwhile understanding how they work and how they can enhance and improve your lifestyle as they evolve.