What is Bitcoin and should you invest?

Bitcoin, along with other cryptocurrency, has become popular as its value reaches record highs lately. But what is Bitcoin, and should you invest in it?

What is Bitcoin?

Bitcoin is a digital currency (or cryptocurrency) created in 2009 as an alternative to government-issued currencies. There are no physical Bitcoins - it’s created, traded and stored within a computer system called blockchain technology. It is not legal tender and often is used in illegal transactions. One Bitcoin in January was worth about $US36,000, but this price fluctuates widely. Bitcoin is just one of many different cryptocurrencies. You may be able to use Bitcoins to pay for certain things. 

What type of investment is it?

A cryptocurrency is referred to as a speculative investment, meaning it involves a high degree of risk and the price fluctuates. Speculative investment is usually done with a short term focus, compared to a long-term investment where the value of the investment is expected to rise over the long term. Another example of speculative investment is property flipping, where an investor buys a property in a hot market, then resells it a short time later to try to earn a quick profit. 

I’m keen to invest, what risks are involved?

  • Cryptocurrency is highly volatile. The value can rise and fall quickly and dramatically.
  • Cryptocurrencies aren’t regulated in New Zealand, meaning there is no help when things go wrong for a cryptocurrency investor.
  • Hacking, fraud and scams can be a big problem. Cryptocurrency platforms and investors are often a target of cyber crime. If your cryptocurrency is stolen, it’s unlikely you’ll get it back. 

Things to think about before investing in cryptocurrency

  • Are you investing money you can afford to lose? Bitcoin’s value can fall quickly and dramatically, and this may happen at a time you’d like to withdraw your money and use it for something else. 
  • Do you have debt? If you have high-interest debt, such as personal loans or credit cards, it may be best to pay this off before considering any investments. 
  • Do you have an emergency fund? Start with $500 spare, but try to build up to three months’ worth of expenses. This is your safety net when things go wrong. Avoid viewing any money invested as your emergency fund, as its value could change.
  • Are you aware of all the risks involved? Investing comes with risks, and investing in cryptocurrency is high risk. 
  • Are you comfortable investing in something you might not know about? For many people, how cryptocurrencies work and who is behind them is completely unknown or the information is not made public. 

More information:

Financial Markets Authority: Cryptocurrencies 

Investopedia: What is a cryptocurrency?

Published 26 January 2020

Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with an independent financial adviser. All content is correct at time of publication date.