Before this fall, maybe you’d never heard of Bitcoin. But unless you’ve been living under a rock, you surely know about the cryptocurrency now: Since September 15, the price of one Bitcoin has surged from about $3,300 to nearly $17,000. That’s a whopping 415 percent return—in just three months. Go back to mid-January, when Bitcoin was worth about $800, and that’s a 2,000 percent return on investment.
This astronomical growth has a lot of people jumping into the game, especially now that both Bitcoin futures trading and the world’s first crypto-index fund (which is only open to “accredited investors” who meet certain income or net worth minimums) launched this week.
But is it really a smart investment?
Quick refresher: What’s cryptocurrency again?
A cryptocurrency is a computer-generated currency that uses encryption for security. Cryptocurrencies are completely digital, and have no physical form. They’re essentially strings of code.
Bitcoin was the first created, back in 2009, and has the most name recognition. But there are currently dozens of competing “alt-coins” on the scene, including Litecoin, which has seen its own explosive growth of 7,291 percent in 2017.
Excuse me, while I go invest my life savings in cryptocurrencies…
Not so fast. This type of investing is very speculative—and, therefore, risky. For starters, cryptocurrencies aren’t backed by a government institution, making them completely decentralized. For some, that’s part of the appeal—because you don’t have to rely on banks, bitcoins are easily transferred anytime and allow for essentially anonymous purchasing—but it also means there isn’t a regulatory agency to intervene if values take a nosedive.
Plus, unlike gold, cryptocurrencies have no intrinsic value; they’re only worth what someone’s willing to pay. “Unlike stocks, bonds or real estate, bitcoins, for example, do not generate income or pay dividends,” explains Certified Financial Planner Taylor Schulte of Define Financial. “When you buy bitcoins, you are essentially betting on price appreciation alone as a way of making money on your investment.”
As a result, we’ve already seen some wild swings in value. Between January and November 2013, the value of Bitcoin shot up from under $15 to nearly $1,000, according to CoinDesk’s Bitcoin price index. Then it fell into the $200s in 2015, before skyrocketing again this year.
What does this mean for long-term cryptocurrency investing?
It’s tough to say. Unlike with the stock market, we don’t have a century’s worth of historical data to analyze for trends—though some experts have already warned that we’re entering bubble territory.
So should I invest in cryptocurrencies at all?
You can buy coins (for a fee) through exchanges like Coinbase. But before you do, be sure it’s money you can afford to lose without affecting your quality of life.
“Ask yourself, ‘What amount of money could I lose and not lose any sleep over?’” suggests Certified Financial Planner Jon M. Luskin of Define Financial. In other words, make sure investing in cryptocurrencies wouldn’t jeopardize your ability to achieve other money goals, like building an emergency fund, paying off debt and investing for your future.
“You could win big,” says Schulte. “But odds are you would do much better with a low-cost, diversified investment portfolio.”