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Deciphering Crypto

For a long time it was seen as the domain of fanatics. Yet with the likes of Tesla and Goldman Sachs making positive noises on bitcoin earlier in the year it would appear that cryptocurrencies, and particularly bitcoin are going mainstream. Here is what you need to know:

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  1. Bitcoin and fiat currencies, why it matters.

We are accustomed to using "fiat" currencies to buy and sell goods. These currencies (such as the £, $ or Euro) are issued and backed by governments. Fiat currency gives central banks greater control over the economy because they can control how much money is printed. You may have heard about QE (quantitative easing = printing more money), a technique used to help governments out of the latest financial crisis in 2008. QE is only possibly because we all use fiat currencies. One outcome of printing money can be greater inflation (because increasing the supply of money increases the amount of money that people have in their pockets, which in turn increases demand for goods and services ==> inflation).


Bitcoin meanwhile is not issued or backed by governments. It is fully "decentralised". This means that we do not needs banks to buy and sell bitcoin. The reason it can exist in this way is due to its underlying technology, called the blockchain. You can think of the blockchain like a massive Excel spreadsheet where each transaction made with bitcoin is recorded (anonymously) in a specific cell. And that's how there's enough trust to enable the transactions to occur.


As bitcoin is decentralised it cannot be "manipulated" by governments to prop up or reign in the economy. This has led to its label as a "democratic" currency.


Bitcoin can only be "issued" by mining, and bitcoin mining is notoriously energy-intensive, which has led to concerns about the impact on the environment of its mining.


2. How do bitcoin prices move


The bitcoin price is highly speculative. In March this year it went over $60,000 and now sits at around $37,000. A year ago it was under $10,000.

Noone really knows what causes the swings in bitcoin price. It is highly momentum-driven, meaning that once the price looks like it is on the increase, people pile in and buy it, pushing the price higher. And the same thing happens on the way down. This is one of the reasons why it is tricky to trade.



3. What else can bitcoin do?


The aim for bitcoin is that it is a store of wealth, like other currencies or gold, for example. Whilst bitcoin has succeeded in being used for transactions, it does not yet have the store of wealth characteristic. This is because of its highly speculative nature. Having said that, given its performance recently it seems to be well on its way.


4. Should I invest in bitcoin?


Because it cannot be used (yet!) as a store of wealth, it is a risky strategy to just buy bitcoin and hold it in the hopes it will go up in the future. Its speculative nature requires you to keep an eye on the price and how the currency as a whole is developing. Dabbling is an option, putting in a small portion of your overall investments into bitcoin, as long as emotionally and financially you can afford to lose it. And not keeping it in there, but taking profits (selling) once the price goes up and buying again as the price declines.


Once we buy a cryptocurrency like bitcoin the principles of trading apply, in terms of paying attention to entry price (at what price are you happy to buy bitcoin given the swings in prices?), and trying to buy at a lower price and sell higher.


5. Cryptocurrency and women


Recent research highlighted that only 15% of traders in Bitcoin and Ethereum (another cryptocurrency) are women, although that number is rising. This is relatively low and may reflect the high-perceived risk associated with crypto. As mentioned, however, if you enjoy trading and getting educated in new investment strategies it could be a fun way to try out a different type of investing, as long as you can stomach it on the way down!