As the price of Bitcoin breached $50,000 (R740,000), the fear of missing out once again hit all-time highs for many investors.
However, South African actuary Imran Lorgat says a sure way of telling that you are about to make an investment mistake is when you are being spurred on by a strong fear of missing out.
Lorgat has been investing in Bitcoin for the past five years. While he considers Bitcoin a breakthrough technology, he also cautions that cryptocurrencies are highly speculative digital commodities and that they will challenge investors with extreme volatility.
If the “should I or shouldn’t I” question is keeping you awake at night, Lorgat’s advice is to take guidance from tried and tested investment principles.
Understand what you are buying
According to Lorgat, you should make sure that you have a solid understanding of what you are buying and the risks that come with your investment.
“Many invest in cryptocurrencies without a solid grasp of the basics. If you are interested in buying Bitcoin, then invest time into researching how it works and the risks associated with owning Bitcoin.”
Since the advent of the internet, developers have succeeded in digitising everything from the written word, to audio and visual material.
Attempts to digitise a currency had, however, failed until 2008 when an anonymous developer, or group of developers, under the pseudonym of Satoshi Nakamoto succeeded in creating Bitcoin, the world’s first successful digital currency.
Lorgat explains that Bitcoin, in essence, is a new technology. “It is a digital currency that is not issued or controlled by a government or a central bank.
Instead, it is managed by its users who secure the system using software that anyone can download. People can send Bitcoin to each other without the need for a bank or financial intermediary. And they can store it in their own digital wallets.”
But beware, says Lorgat. “A wallet held on a cryptocurrency exchange is not the same as a wallet that can only be accessed by you.
The wallet on an exchange is like a bank account where money is held on your behalf. A Bitcoin is only truly yours if it is held in your personal wallet, on your laptop, phone, or wallet device.”
Understand the risk
While Bitcoin is arguably the world’s most volatile currency, Lorgat points out that it is important to differentiate between short-term volatility and long-term investment fundamentals.
“The price of Bitcoin over the long-term is driven by supply and demand, as well as adoption and technological development of the currency. However, in the short term, the price is driven mainly by hype and emotion.”
Lorgat says the Bitcoin volatility experienced in 2017 showed that market hype was driving the price rather than informed choices based on facts.
“Investors who had done their research and who had insights into the enormous technological developments taking place in the Bitcoin space were holding on to their Bitcoins, while…