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Should I invest my hard-earned money into Bitcoins?

Bitcoin

To consider bitcoin as a potential investment, you must first understand what it is, where it comes from and where it is going.

Photo credit: File | Nation Media Group

I am interested in knowing more about Bitcoin. I know the Central Bank of Kenya does not support it and everyone talks about how risky it is to invest in it, but isn’t every investment a risk? The last time I checked, one Bitcoin was worth about Sh6.8 million. Would you invest in it? If not, why? Also, as you answer that question, also comment on whether it is a good time to sell my shares now that the country is going into an election. Job.

First and foremost, I am glad that you have acknowledged the fact that the CBK has not offered support for Bitcoin. It is a complicated asset whose operations are difficult to understand. The first rule in investing is that you should never put your money in any asset that you don’t understand how it makes or loses money.

Bitcoin is a good investment but is not everyone’s money making machine. It is characterised by one-sided information asymmetry that makes it unconducive to people referred to in the investment space as retail investors, though there is a size of investment that can earn a significantly huge return. The smaller the investment the smaller the return, while the larger the investment the higher the return.

 Retail investors drive markets through small purchases of assets many times made without considering significant information. They either rely on advisors to make purchases or pure gutfeel. 

In public markets such as stock exchanges, small retail investors rely on partial or sometimes no information at all to make purchases of shares of companies and provide liquidity. 

The stock market provides them with the safety of information availability to reduce their fears or instead strengthen their belief in an asset. Such purchases would be suicidal with bitcoin. Retail investors do not need detailed information on an asset to make a purchase.

 Bitcoin is a complex asset. You need to understand the process of release of coins into the market because it is the main source of primary supply. You also need to know the state of supply and demand for coins in various exchanges and geographies to develop a good feel of sources of cheap coins and areas demanding the same, so that you can broker between them profitably. A sophisticated investor who can access and process information on the supply and demand of coins will make money from this market.

You make money from bitcoins by selling a coin for a profit, the equivalent of capital gains in share value. You can either buy and hold coins, then sell in future for a gain or you can source coins from a cheaper source and sell immediately for a small profit by leveraging your access to supply side market information.

This requires information unfortunately not available to everyone at the same time. It is important to note that coins are traded in a few exchanges and the information asymmetry is huge. An ability to take on huge financial outlay is a key success factor in the market today.

 You also asked whether you should sell your shares, basing your fears on the uncertainty that follows election periods. There is no right or wrong answer to this question. An investor driven by profit taking will always buy cheap and sell high. 

Election periods come with uncertainties that may affect performance of some companies (share values slide) while concurrently making business for other companies (share values spike). You need a good eye for isolating businesses that make money during these periods for a buy decision and sell those that lose money.

 Patrick Wameyo is a financial literacy coach at Financial Academy and Technologies, and an entrepreneurship coach at The Entrepreneurship Center EA. [email protected].