Investors looking to join the rollercoaster ride that is Bitcoin need to consider three important points, according to AJ Bell’s investment director Russ Mould.
The virtual currency has been making headlines lately after surpassing its recently set all-time high and climbing above $16,000 last week.
Indeed, it has become easier to speculate on the future value of Bitcoin, with the introduction of the first-ever bitcoin futures on the CBOE futures exchange.
A futures contract is a deal between a buyer and seller, whereby they agree to exchange an asset for cash in a pre-set quantity, for a pre-set price on a pre-set date in the future.
While opinion within the investment industry remains largely mixed, there is no doubt in the popularity of the online currency, which has rocketed in value over the past 12 months.
Performance of Bitcoin over 1yr
Source: Coindesk
With so many now interested in investing in the virtual currency, is now the time to look at what Bitcoin is and where the price can feasibly go from here, asks Mould.
“Few if any market participants thought that Bitcoin would get to a price just shy of $17,000 as quickly as it has – if at all – so it would be foolish to try and call the top,” he said.
“Such price surges have a habit of becoming self-fuelling and this could easily be the case this time, given plentiful global liquidity and the finite supply of bitcoins.”
However, potential Bitcoin-buyers or futures traders need to be sure in their own minds what it is, the investment director noted.
For example, while America regulates it as a currency and Korea regulates it as a commodity, the recent rampant price action suggests that a lot of people view it as an investment.
“Any would-be buyer or trader needs to make up their own mind so they can then assess whether the price movements and potential return fit with their overall portfolio strategy, target returns, time horizon and appetite for risk,” Mould said.
Bitcoin is not a commodity in the classic sense, he argued, despite the recent launch of the trade futures allowing investors to purchase it in the same way as oil, aluminium, cotton or orange juice.
“It has no physical form and does not help buyers produce or do something else – which is the case for hogs, industrial metals, energy or even gold and silver,” he noted.
Meanwhile, it is not an investment as it generates no cash so cannot be viewed in the same way as a security like a corporate bond or stock, which can generate cash and pay dividends or coupons.
“Its origins lie in the world of digital currencies and a hedge against central bank money printing but few people would feel comfortable going to a bureau de change if the pound was moving around by 10 per cent to 20 per cent a day or more,” Mould added.
Indeed, all ten of the biggest cryptocurrencies – currencies using cryptology to control issuance, security of transactions and the transfer of assets – by value are currently trading below last week’s highs and some of the drops are very sharp, as the below table shows.
Performance of cryptocurrencies over 1wk
Source: AJ Bell
“There is an old saying that markets ‘buy on the rumour and sell on the fact’, trying to anticipate an event and factor it into valuations and prices before it happens – so that when something does come to pass investors are already moving on to the next idea,” Mould said.
“This may give some investors cause to wonder whether the market has already ‘bought on the rumour and sold on the fact’, although such a theory could be confounded if the leading cryptos were to move higher and sustainably forge new price highs.” 
For investors looking to cash in on the latest futures launch, they should also be aware that they tend to appear a lot nearer the top in prices than the bottom.
For example, the ABX index was created as a synthetic instrument to allow people to trade the sub-prime mortgage market in America just before the market collapsed and the financial crisis began.
Legendary US investor Warren Buffett said: “A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street — a community in which quality control is not prized — will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.”
Mould added: “None of this is to say the Bitcoin game is over. But all three considerations suggest would-be traders or investors need to move with greater caution than the initial futures market action would suggest they are today.”
Indeed, Bitcoin futures surged to an early premium to underlying Bitcoins, according to the CBOE and Coinmarketcap websites, at $16,715 and $19,100 (for March 2018) respectively, while the underlying asset remains below last week’s $18,302 peak.