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At the start of last year most people had never heard of cryptocurrencies, let alone considered them an investment opportunity. But in 2017, cryptocurrencies like Bitcoin and Ethereum catapulted into the mainstream.
I invested in Bitcoin originally 5 years ago, and started actively trading cryptocurrencies on eToro as part of a more diversified stock portfolio just over a year later. Last year alone I made returns of over 400% on that portfolio.
When I first started trading, Bitcoin was largely unheard of even within the 'techie' circles.
But the confidence in the market has grown alongside new use-cases and technology improvements, causing the price to rise by more $20,000 for a single coin just this year.
Bitcoin is now firmly on the map as an asset class.
Cryptocurrencies are often described as digital currencies, raising eyebrows from cynics who question how something that technically 'does not exist' can have any value. To those cynics I would say that Bitcoin has a transferable value. It can be exchanged for other currencies, services and select products, across the globe, quickly, safely and for very low cost.
Like any start-up, there will be hiccups in Bitcoin's development
To really understand Bitcoin though, you need to focus on the underlying technology - blockchain.
Blockchain enables data to be shared in a different way. Using blockchain technology, a Bitcoin transaction takes place from person to person, without the need for a middle man such as a bank to facilitate the transfer. One benefit is that your risk of having data stolen decreases. Your details are not being held by a third party. Another is that these transactions are immutable; nobody can change them unless the entire network agrees.
Banks are already looking at ways to use blockchain technology to their advantage. An investment in Bitcoin then, can be seen as a belief in blockchain technology and its long-term future.
In the same way investor sentiment towards a company like Google or Apple can boost the share price, investor confidence in Bitcoin drove the price last year.
Like any start-up, there will be hiccups in Bitcoin's development, for example when new regulation is introduced. Forks, scaling problems and a major news can create extreme jumps and drops in the value of cryptocurrencies.
Indeed, January has been a volatile month for Bitcoin. But this volatility may present opportunities for short term investors.
Top tips for would-be Bitcoin investors
Steps to follow...
Research your platform
It's still a fairly nascent market and some platforms are taking advantage of this. You read stories about people investing online with someone they then never hear from again. There are platforms which have been established for many years and regulated who offer cryptocurrencies (although cryptos themselves are not regulated). Find these.
Research your cryptocurrency
Each cryptocurrency is different. They all have good websites, different communities and different goals. If you are not investing through a fund or any sort of fund manager it is important to know what you are buying into. Understand their vision.
Avoid leverage
I've experienced first-hand that Bitcoin is a volatile investment. Whilst historically the price has always moved back up within a short time period following a dip, it can be nerve-wracking looking at price charts on volatile days. Lots of platforms let investors take on excessive leverage on Bitcoin trades. Whilst this boosts returns on good days, there is a significant risk of losing a lot more than you initially put in if you take on leverage. Given the volatility, I'd treat leverage with caution.
Diversify
It's investment 101. I diversify across a range of cryptocurrencies as well as across a range of asset classes – trading both equities and cryptocurrencies
It doesn't have to be DIY
There are lots of different methods for investing in the cryptocurrency space. Many early adopters will tell you to simply "buy and hold", which works well, but in an environment that changes so rapidly finding a copy-trader or a fund that re-balances based off news and growth is a good option.
Jay Smith is a Popular Investor with global cryptocurrency platform, eToro
