The investment risks of Bitcoin and basics for retirees
How to buy/sell Bitcoin, getting started and considering the risks for over 60s
Every couple of months we read an article about the price of Bitcoin collapsing, or skyrocketing. The topsy-turvy world of cyrptocurrency (“crypto”) continues to keep investors, enthusiasts, speculators and sceptics saying “I told you so”.
You can spend hours researching its history, background, structure and listening to industry experts and regulators beliefs of Bitcoin (which we’ve included at the bottom), but in this article we’ll keep it simple. Here, we cover the basics of what Bitcoin is, the love-hate relationship of Bitcoin, the new demographic of investors now taking part and whether retirees should explore Bitcoin as an investment.
Bitcoin has been in headlines for years, why are we writing about it now?
Over the years, as the Reserve Bank have steadily decreased the cash rate, retirees have seen their returns from terms deposits diminish to near zero. And with record low interest rates expected to be locked in for the foreseeable future – it has forced conservative savers to explore alternative investment options in seeking higher returns. In addition to property and the share market, many retirees and self-managed super funds are starting to explore cryptocurrency as part of these alternative investment opportunities.
Australia’s largest crypto exchange platform, BTC markets, has witnessed a fivefold increase in SMSF client onboarding in 2020 and SMSF professionals are fielding more crypto enquiries than ever before.
So why the returning interest in crypto investment?
The main aspect that has gained global attention is the skyrocketing prices and returns for those that invested their money early on. Since the earlier rise of Bitcoin back in 2015, it ballooned from its 2019 high of over AU$21,000, to a new high in April 2021 of AU$84,600. In the months after the all-time high-to today, it fell below AU$38,000 and recently rebounded back above AU$66,000. Quite a wild ride, and not for the conservative investor.
And this does not take in to account the crazy (and hyper-volatile) world of “Alt coins” which can jump 1,000% in a day, and fall just as quickly the following. For example, Dogecoin (which was originally created as a joke in 2013) has risen 11,000 percent in 2021 alone. Meaning if you invested $1,000 you would have been holding over $240,000 profit – if you sold. It’s currently still up significantly, but has fallen significantly.
Noting the main reason for this coin’s incredible ride was started by Elon Musk’s frequent spruiking about it on his Twitter account. Below are a few examples (note: the dog image is the Dogecoin avatar). Many celebrities and ‘influencers’ have been guilty of spruiking alt coins (generally for money) in a similar manner.
Secondly, major companies such as Microsoft and PayPal have started accepting Bitcoin as payment, giving cryptocurrency a new level of legitimacy. In addition, giving more credibility to crypto was Canada’s securities regulators approving three bitcoin exchange-traded funds (ETFs) within the past few months. And, Coinbase, a crypto trading exchange, recently listed on NASDAQ giving it an initial market cap of $85.8 billion on the day of listing. El Salvador has also recently become the first country in the world to officially classify Bitcoin as legal currency (read more).
What is the purpose of Bitcoin (in a nutshell)?
Bitcoin is a decentralised digital currency. Which means, no banks, no governments, no borders – with the Bitcoin network comprising other people using Bitcoin. Because there is no bank involved, transactions go directly from person-to-person and fees are lower. Albeit transaction times is a lot slower. The transactions are checked, verified and finished – publicly viewable via a ledger, giving greater transparency. This also means you can use Bitcoin in any country, your account cannot be frozen, and there are no pre-requisites or arbitrary limits.
Put simply, Bitcoin offers an alternative to fiat currency, thus not being impacted by inflation. Bitcoin is not issued or backed by any banks or governments.
One of the big reasons behind Bitcoin’s success is the perception that as federal/reserve banks all over the world are printing money, they are consequently devaluing their dollar. Furthermore, the idea of Bitcoin would protect owners from another financial crisis. After all, that is why Bitcoin was created – after tax payers bailed out the 2008 financial crisis.
So, like gold, Bitcoin has been labelled the “new age” digital gold. It also has a finite amount (21 Million Bitcoins can only ever be mined), like gold, but it is a digital asset, not tangible.
The Bitcoin network is secured by individuals called miners. Miners are rewarded newly generated Bitcoins for verifying transactions. After transactions are verified they are recorded in a transparent public ledger.
How exactly to categorise Bitcoin is a matter of controversy. Is it a type of currency, a store of value, a payment network, or an asset class?
Fortunately, it’s easier to define what Bitcoin actually is. It’s software. Don’t be fooled by stock images of shiny coins emblazoned with modified Thai baht symbols. Bitcoin is a purely digital phenomenon, a set of protocols and processes.
Though Bitcoin’s current goal is to be a store of value as well as a payment system, there is nothing to say that Bitcoin could not be used in such a way in the future, though consensus would need to be reached to add these systems to Bitcoin.
Sidenote: If you’re an ethical investor, you may not want to buy Bitcoin. The mining of Bitcoin is power-hungry, involving heavy computer calculations to verify transactions. Bitcoin uses more energy than countries like Argentina or New Zealand. If Bitcoin was a country, it would be in the top 30 energy users worldwide. With its astronomical energy use gaining more publicity (for the wrong reasons), Tesla suspended vehicle purchases using Bitcoin. (Read more here)
For more information and detail behind Bitcoin and how it works, watch the below video. But if you’re more interested in whether a retiree should consider investing in Bitcoin, read on.
Bitcoin Explained Simply for ‘Dummies’
How do I buy or invest in Bitcoin?
Anyone can buy, sell and trade Bitcoin on a crypto exchange (just like shares on CommSec) – where buyers meet sellers and the transaction takes place. The exchange charges a fee per transaction, generally a percentage of the amount you buy or sell. The owner can hold the coin on their crypto exchange or store on a digital wallet. There are now over 504 crypto exchanges available.
And you don’t need AU$66,000 to buy Bitcoin. Unlike the share market, you can buy fractions of a Bitcoin. For example, if you only want to invest AU$1,000 in Bitcoin, you would be buying 0.01515152 of Bitcoin. Just like the CommSec exchange, you would simply enter the amount you want to spend/invest and your desired buy price, or you can buy ‘at market’ price.
Crypto trading and crypto exchanges operate 24-hours a day, 7-days a week. You can buy or sell Bitcoin at any time of the day, on any day of the week, anywhere in the world. It never stops. Whilst for some, this is a day-traders heaven – for others, 24/7 trading creates unhealthy addictions. Many people become infatuated with checking the price of their Bitcoin – in the morning, throughout the day, in bed before going to sleep. You can imagine how unhealthy this could be, especially if the price is crashing, it can keep you up at night constantly refreshing your screen.
Before we provide more information on crypto exchanges and what you need to get started below, let’s first cover the pros and cons of whether the over 60s and/or retirees or should be getting in to the Bitcoin game.
Is now the time to invest in Bitcoin as a retiree?
You’ve probably heard your kids or grandkids bragging about how much money they’ve made buying crypto. Whilst this is fantastic for them, it’s important to remember that the younger generation are more comfortable in taking risks with money, because they have many more years until retirement. But retirees don’t have this luxury, and are generally more risk-averse to investment decisions. As such, we need to be mindful that we don’t lose what we can’t afford to. Similar to your Superannuation structure – as we get older, it is recommended that we move our Super investment scale to a more conservative and balanced strategy to reduce the risk of losing money.
So, first ask yourself, “Am I willing to lose any money I put in crypto?”. If the answer is no, then you should absolutely not put any money in Bitcoin or any other crypto coin. Steer clear!
If the answer is yes, you should first do your own research and learn more about the function behind crypto coins. If you are considering investing a decent amount, it is strongly recommended to talk to a financial adviser, an accountant or an expert in the field and consider your strategy. (Caution: be sure to do a background search on any self-proclaimed Crypto/Bitcoin expert as many are scammers). Alternatively, find an SMSF or managed fund that will invest in Bitcoin for you, or look for a Bitcoin ETF in the share market.
Most of our readers we talk with that have bought Bitcoin, have only put in a small amount, as a bit of fun with their kids and grandkids. Most aren’t long-term holders but merely buy in to share stories and conversations with the young ones.
If you are a long-term holder, it’s important to consider a sell price and stick to it. Do not get greedy. Remember, the price of Bitcoin fell to AU$11,000 after the share market crash of March 2020. It then soared to break the it’s all-time high AU$84,600 before dropping down to AU$38,500, and then rebounding again to reach AU$68,000 within a span of 6-months.
Or perhaps you want to buy-and-hold to leave the investment with your kids, or gift it as a birthday present. If this is the case, consider creating the account in their name, not yours.
The bigger question is: Are SMSF’s and Bitcoin investors sitting on an investment time bomb that is volatile, high risk and overheated, with no underlying assets or government regulation to support the price? Again, it depends on who you ask (see quotes below), But ultimately only time will tell.
The risks of Bitcoin
While some Bitcoin investors may continue to profit, others, especially those who get in now, have just as good of a chance of losing it all. Here are the biggest risks of investing in Bitcoin.
Bitcoin is still incredibly volatile.
The price of Bitcoin — and all cryptocurrency, for that matter — is incredibly volatile because it is such a young currency and market. It is not uncommon for the price of Bitcoin to experience wild swings within a day or even within minutes. This makes trading a dangerous venture. Typically, fundamentals would support currencies in general. But Bitcoin isn’t a fully functioning currency, and its “fundamentals” are still emerging.
Bitcoin isn’t money.
Another reason that Bitcoin is so risky is that it is a tradeable asset but it is not backed by anything. Bitcoin has value only because the people who are trading it say it has value. There are no governments or regulatory bodies helping Bitcoin retain its value. The value is all basically “made up”, for lack of a better word.
Bitcoin is not as disaster-proof as people think.
One of the biggest arguments for investing in Bitcoin during and after the pandemic is that it is a great hedge against fiat currency, national banks or even the entire financial system, should it fail. A perfect example of when the pandemic crash in March 2020 set in, Bitcoin and all crypto coins crashed with it. It didn’t work as a hedge at all. And if you wanted to sell your Bitcoin during a crash, remember it’s only worth the price that someone else is willing to buy it at. Meaning, if it’s falling by the minute, and there are no buyers, you would have to sell at a considerable discount.
Bitcoin is unregulated and offers little protection if things go bad.
As a share trader, you can at least be rest assured that the share markets and listed stocks traded on the financial exchanges are regulated. If you have a dispute, you will have a regulatory audience. If you step outside this world toward the unregulated and decentralised world of cryptocurrencies, you may be on your own.
Ultimately, it’s about risk and your willingness to accept both gain and loss.
Maybe you’re willing to take that risk. If you are, then it’s important to fully understand what you’re getting into — not just what you can gain, but everything that you can lose.
Next steps, if you’re still interested in buying Bitcoin
Choose an Exchange to buy Bitcoin
Before you buy Bitcoin there are several things that every aspiring Bitcoin investor needs. A cryptocurrency exchange account, personal identification documents if you are using a Know Your Customer (KYC) platform, a secure connection to the Internet, and a method of payment. It is also recommended that you have your own personal wallet outside of the exchange account. A personal wallet is not mandatory to buying/selling Bitcoin, but we strongly recommend using a two-factor authentication/verification (2FA) if you are going to store your Bitcoin on the exchange only – as many coins have been stolen on exchanges in the past.
Signing up for a cryptocurrency exchange will allow you to buy, sell, and hold cryptocurrency. It is generally best practice to use an exchange that allows its users to also withdrawal their crypto to their own personal online wallet for safer keeping. For those looking to trade Bitcoin or other cryptocurrencies, this feature may not matter.
If you’re looking to get started with cryptocurrency trading or investing, choosing the best exchange for your goals is important. Whether you want the most currencies, the lowest fees, or the easiest experience, there is a good option for you. For most investors, Coinbase or Binance is a good overall cryptocurrency exchange. BTC Markets is an Australian-based crypto exchange and offers Bitcoin. It has a small number of alt coins on offer and is a simple exchange for the beginners.
Once you have created an account, you can buy your first cryptocurrency.
Quotes on Bitcoin
In support of the aforementioned enthusiasts, sceptics and speculators of Bitcoin, here’s a random selection of quotes by industry experts, government bodies, and business professionals across various sectors.
What does Warren Buffet think about Bitcoin as an investment?
In 2020 he told CNCB, “I don’t have any Bitcoin. I don’t own any cryptocurrency, I never will.” More recently, Buffett has called bitcoin a “delusion” and “rat poison,” and he vowed last year to never own any cryptocurrencies, arguing they attract charlatans and “basically have no value.”
Charlie Munger, Berkshire Hathaway Vice Chairman (Warren Buffets right-hand man)
In May 2021, Munger said he hates bitcoin’s recent gains, arguing the currency was “created out of thin air” and is a go-to payment method for criminals. Continuing, Munger says, “I don’t welcome a currency that’s so useful to kidnappers and extortionists. I think the whole damn development is disgusting and contrary to the interests of civilization.”
Munger, for his part, has called bitcoin “artificial gold” and insisted its volatility makes it useless as a means of exchange, and he’s compared crypto investing to “trading turds.”
Satoshi Nakamoto, creator of Bitcoin (identity still unknown)
If you don’t believe it or don’t get it, I don’t have the time to try to convince you, sorry.
Bill Gates, the father of all programming and founder of Microsoft
Bitcoin is a technological tour de force.
Nassim Taleb, Author and Risk Analyst
Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.”
Steve Eisman, American businessman and investor (known for the movie “The Big Short”)
What value does cryptocurrency add? No one’s been able to answer that question to me.
Janet Yellen, former chair of the US Federal Reserve
The Federal Reserve simply does not have authority to supervise or regulate Bitcoin in any way.
Adam B. Levine, founder of Let’s Talk Bitcoin and the current CEO at Tokenly
As the value goes up, heads start to swivel and skeptics begin to soften. Starting a new currency is easy, anyone can do it. The trick is getting people to accept it because it is their use that gives the “money” value.
Rick Falkvinge, IT entrepreneur and founder of the Swedish Pirate Party
Bitcoin will do to banks what email did to the postal industry
Torbjorn Magnusson, Chairman of Nordea Bank
For Bitcoin and cryptocurrencies to be mainstream, they would have to be regulated, wouldn’t they? So that’s a step that is clearly missing.
Jerome Powell, Chair, US Federal Reserve
They’re highly volatile, see Bitcoin, and therefore not really useful as a store of value. They’re more of an asset for speculation. So they’re also not particularly in use as a means of payment. It’s essentially a substitute for gold rather than for the dollar.
Eric Schmit, executive chairman and former CEO of Google
[Bitcoin] is a remarkable cryptographic achievement… The ability to create something which is not duplicable in the digital world has enormous value…Lot’s of people will build businesses on top of that.
Al Gore, 45th Vice President of the United States
I think the fact that within the bitcoin universe an algorithm replaces the functions of [the government] is actually pretty cool. I am a big fan of Bitcoin.
Tyler Winklevoss, American investor
We have elected to put our money and faith in a mathematical framework that is free of politics and human error.
Gita Gopinath, Econmoic Counsellor, International Monetary Fund
Bitcoin is an example of a cryptocurrency that doesn’t serve the role of money at all. It’s a very speculative investment class. In terms of substituting for what money is, I don’t think it comes close.”
Peter Thiel, Founder of Thiel Capital LLC
I do wonder whether at this point, Bitcoin should also be thought [of] in part as a Chinese financial weapon against the U.S. It threatens fiat money, but it especially threatens the U.S. dollar. [If] China’s long Bitcoin, perhaps from a geopolitical perspective, the U.S. should be asking some tougher questions about exactly how that works.”
Janet Yellen, US Treasury Secretary
I don’t think that Bitcoin—I’ve said this before—is widely used as a transaction mechanism. To the extent it’s used, I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions. And the amount of energy that’s consumed in processing those transactions is staggering. But it is a highly speculative asset, and I think people should beware.
For more reading on Bitcoin, mining and alt coins there is mountains of sites. But for the beginners, best to start from the beginning. Here are some beginner-level cheat sheets:
- Cryptocurrency 101: the history of bitcoin
- Why Governments Are Afraid of Bitcoin
- Bitcoin For Dummies
- How Bitcoin Works
- How To Store Bitcoin
- Bitcoin Mining Explained