Pop-up money – Does it pay to invest in cryptocurrency?
Bitcoin, XRP, and Co. – It was difficult to escape the hype about cryptocurrencies. New regularly reported on price explosions, young self-made millionaires, and high potential profits. In December 2017, Bitcoin celebrated its absolute peak with a value of almost 20.000 USD. In the meantime, the hype around the virtual currency seems to have died down. Still, one-third of all Germans considers cryptocurrency as an investment.1
According to a survey from June 2018, about 8 % of all Germans and Austrians own Bitcoins or a similar cryptocurrency. This puts them, like Italy, just above average compared to the rest of Europe. In France it is only 6 %, in the Czech Republic 9% and in Poland 10 %. There are particularly many investors in Romania (12 %) and Turkey (18 %).2 An investment in cryptocurrencies can pay off but also comes with many risks. Before picking up your cash, you should definitely look into the topic in detail.
The ABCs of cryptocurrency
Even though the name Bitcoin suggests that there are coins, cryptocurrencies only exist in the virtual world. Instead of in your pocket, you keep your virtual money online or on a USB stick, the so-called wallet. This is anonymous and encrypted, hence the name cryptocurrency. More and more online shops and other service providers accept cryptocurrencies as payment. Especially when paying abroad, the coins have a great benefit: while normal transfers can take several days and come with high fees, with Bitcoin and Co. it takes less than 10 minutes and is almost free. This is possible because the coins are transferred directly from wallet to wallet without using banks or other central institutions as intermediaries. Information about the individual transactions are stored on a distributed blockchain. This process makes the system transparent and relatively safe. In the meantime, there are more than 1500 different cryptocurrencies, each for a different purpose. Bitcoin for instance is mainly intended for peer-to-peer payments. Ripple wants to revolutionize payments between banks, and Etherium wants to establish itself as a platform for smart contracts. If you want to invest in cryptocurrencies, you should first always find out about the goals of the company behind the currency. With so much selection, this is no easy task.
Value investors warn of risks
However, in particular value investors warn of the risks of cryptocurrencies as investment. Value investment is an investment strategy that follows the price vs value principle: always invest when the price of a stock is less than its value. The profits of the underlying company provide the information about the value of a stock. And this is precisely the problem with cryptocurrencies. Such a value cannot be calculated. The price is determined solely by supply and demand. If you purchase something whose value you don't know, hoping that the price will increase, this is called speculation, not investment. And speculation always comes with certain risks. With cryptocurrencies, the risks lie mainly in the high price fluctuations. It is also uncertain whether they will really establish themselves as a payment method. As an investment, cryptocurrencies can thus not be compared with stocks, bonds, or real estate. But, you don't have to rule them out completely. For investors with nerves of steel, investing in cryptocurrency may absolutely be rewarding. You just cannot be afraid of losing it all – even today's Bitcoin millionaires say this.3
Alternative investment possibility
However, risk averse investors can also profit from cryptocurrencies without exposing themselves to the high price fluctuations of the coins. An alternative investment possibility is the acquisition of stock in the companies that stand behind the cryptocurrencies or blockchain technologies. Instead of investing in Stellar Lumen, you can for instance also invest in IBM stock – i.e. in the company that has started the blockchain project in the first place. This is one way to minimize the risk.4
Experts assume that cryptocurrencies will see another boom towards the end of the year.5 So it cannot hurt thinking about investing in coins or the blockchain technology.