Dubai: Financial experts in the UAE have reiterated a warning about the potential risks of putting their money in bitcoin, as excitement over the virtual currency intensifies and more and more people are dumping gold over it.
The cryptocurrency has been rising in popularity over the years and as of Tuesday, the value of one bitcoin surged to $16,472 – a massive leap from just $0.0003 in early 2010.
While it’s tempting to jump on the bitcoin bandwagon given the meteoric rise of the currency, investors who are not familiar with it would do well to hold on to their money. Buying bitcoins to make a quick buck isn’t a really good idea, especially since the currency remains unregulated in many markets, including the UAE.
“Bitcoin as a currency is not legally accepted by most governments, although they have not earned it as illegal as well,” Vijay Valecha, chief market analyst at Century Financial Brokers, told Gulf News.
What is bitcoin?
Bitcoin is a new kind of currency that’s completely virtual, so there’s nothing people can touch or hold when they buy it. It can be bought online and used to make purchases, but the list of things users can buy with it is still quite limited.
Despite the potential risks, there are a number of UAE residents who have acquired bitcoins. One of them is Christopher, who has recently seen his bitcoin savings soar to more than $1,000 since he purchased them.
“Years ago, I bought just a small fraction of a bitcoin (0.06) for about $100. I’ve used it a few times and now I have a little over $1,000 in my account. Last week, it was $800.”
Christopher said he acquired bitcoin because it sounds fun. He uses the virtual currency to buy stuff online, including video games. The money is not widely accepted as a means to make a payment, especially in the UAE, so Christopher remains wary about increasing his bitcoin holdings.
But does he consider bitcoin as an investment? “It’s nothing. It has no intrinsic value. You can’t do anything with it. People say it’s a commodity, but it’s not like buying gold where you actually get a piece of gold,” he said.
How to use bitcoin to make a payment
Even using bitcoin to make payments online is a very complicated process. Users have to pay a processing fee to be able to buy something with it. Just recently, Christopher bought a video game worth $20, but he waited for five hours to get his transaction through.
“When you buy something with a bitcoin, you have to look for someone to process it and to get hold of that person, you have to bid. Those who process would obviously pick first the ones who offer the highest transaction fee, and since I didn’t want to pay more than a couple of cents, I had to wait a long time to complete the purchase.”
The UAE Central Bank had earlier warned the public against investing in bitcoin, citing that the currency is still “unofficial” and lacks “sufficient supervision.”
“It can be easily used in money laundering and in funding terror activities,” said Mubarak Rashed Al Mansouri, governor of the UAE Central Bank.
Bitcoin versus gold
Analysts have said that some investors are actually abandoning gold in favour of bitcoin and that is partly the reason why the precious metal has been falling in value.
The price of gold is pegged at a little over $1,200 an ounce, while one bitcoin is valued at more than $16,000.
“Bitcoin has stolen a large market share of gold,” Phillip Streible, senior market strategist at RJO Futures, was quoted by Express.co.uk as saying.
Valecha pointed out that digital money is highly volatile and high risk, but if investors really want to go for it, they should not park more than 5 per cent of their portfolio in bitcoin.
“Virtual currencies are still unregulated and come with very huge risks. The major risks involve exchange risk, legality risk, authenticity risk and of course market risk. An investor should look into all these risks before investing.”
Ellliot Parkhouse, senior financial planner at Guardian Wealth management, also advised UAE residents not to get carried away by the euphoria over bitcoin. “Like anything don’t just invest because your friend told you to, but do your own research and make a decision that way. You need to understand how it works, is it liquid and decide what you are willing to risk,” Parkhouse said.
“Bitcoin isn’t the easiest thing to invest in, you need to buy them safely. I would be worried about investing in a company that just popped up on your Facebook feed. If you decide to buy virtual currencies such as bitcoin, do your research and use a legitimate seller.”