As the world is becoming ever more reliant on the internet, it is no surprise that Bitcoin, a secure, global, and digital currency, has investors’ interest. It is open to everyone and provides an appealing possibility to delve into an entirely new asset class. Yes, investing in Bitcoin seems scary, but it takes time and effort to understand how it works.
For some people, it is still unbelievable that how one bitcoin can be worth thousands of dollars. But what makes it so valuable? It because they are scarce. For instance, there is a limited amount of gold on earth. As we mine new gold, there is always less and less gold left, and it becomes harder and more expensive to find and mine.
“Gold is a very under-owned asset, even though gold has become much more popular. If you ask any central bank, any sovereign wealth fund, any individual what percentage of their portfolio is in gold, you’ll find it to be very small. It’s imprudently small, particularly at a time when we’re losing a currency regime.”
– Ray Dalio, Legendary Hedge Fund Manager (1).
It is the same with Bitcoin. There are only 21 million Bitcoins, and as time goes on, they become harder and harder to mine
(2). Here is Bitcoin’s inflation rate and supply rate:
But is investing in Bitcoin still worth it?
Investment in Bitcoin
Apart from being scarce, bitcoins are also very useful. It offers a sound and predictable monetary policy that anyone can verify. It is one of its most important features because it makes it possible to see when new Bitcoins are created when a transaction is made, or how many bitcoins are circulating.
One can send Bitcoins from anywhere in the world to anywhere else. No bank can bar payments or close your account since it is censorship resistant money. Bitcoin makes border payments possible and offers an easy way for people to escape failed government monetary policy.
The information on the internet is global and easy to access. A sound, global currency such as Bitcoin would have the same impact on the global economy and finance. If you understand its potential impact, then it won’t be hard to understand why investing in Bitcoin may be a good idea.
Bitcoin is considered an uncorrelated asset. It means that there appears to be no link between the traditional stock and bond markets’ performance and Bitcoin (3). It is desirable for traders who are looking to diversify risk out of their portfolio. If they add Bitcoin to their portfolio, they can reduce the likelihood of a major downturn in stocks from adversely affecting the net worth.
There is no official Bitcoin price, and it is said by whatever people are willing to pay. The valuation is commonly shown as the cost of 1 Bitcoin. In spite of that, exchanges will let you to buy any amount, and you can buy less than 1 Bitcoin.
It is vital to know that Bitcoin is just another form of money, and people usually do not give away money for free. So, it would be best if you were very skeptical of anyone promising to give you bitcoins for free. Sometimes you can get small amounts of Bitcoin for free when various exchanges and Bitcoin interest accounts give you Bitcoin to open an account on their platform. These offers scale from about 10 to 250 dollars worth of Bitcoin, depending on how much money you fund in the accounts (4).
If you wonder if you could get rich with Bitcoin, you need to understand that no one knows about that, and no one will ever know. If someone assures you to make you rich with Bitcoin, someone will be scamming you. Remember that Bitcoin is still considered by the most to be a risky investment, and you should never invest more than you can afford to lose. Make sure to consult a licensed financial planner since highly volatile assets tend to have greater potential for return as a match by their potential for incredible loss.
When it comes to protecting near-term Bitcoin prices, anyone’s guess is just about as good as anyone else’s case since nothing is for sure in any market. Throughout history, it has generally increased in value faster, followed by a study slow downfall until it stabilizes. There are several tools you can use to analyze charts and understand Bitcoins’ price history.
Bitcoin is global; it is less affected by any country’s financial situation or stability, whether good or bad. For instance, speculations about the Chinese Yuan devalue in the past had caused more demand from China, which also pulled up the exchange rate on the US and Europe-based exchanges (5).
The world has also seen bull markets in Bitcoin in the United States result in large arbitrage events in the market with less liquidity due to capital controls like Korea. In the case of Korea, this was known as the ‘Kimchi Premium.’
“The daily average price ratio between the US and Korea between December 2017 to February 2018 reached 40% for several days. We estimate that a minimum of $2 billion of potential total arbitrage profits was left on the table during this period. In contrast, the price deviations between exchanges in the same country typically do not exceed 1%, on average.”
– Igor Makarov and Antoinette Shoar, Economists, Harvard, and MIT (6).
It was incredibly easy to get bitcoins into Korea to take advantage of the large premium. Ironically, such controls only favors the Bitcoin price as it escalates even further as people realize Bitcoin could do what fiat could not. That is, making cross-border payments in any amount without permission from any regulatory authority.
This example illustrates how worldwide chaos is generally seen as beneficial to bitcoins prices since it is political and sits outside the control or influence of any particular government.
When we think about how we can omics and politics will affect its price, it is important to think globally and not just about what is happening in a single country.
So before we discuss if investing in Bitcoin is worthy or not, you need to understand how Bitcoin works. It is still new, and it can take months to understand its true impact on the world (7).
What is Bitcoin and How it Works?
Bitcoins and other cryptocurrencies are hailed as a market-disrupting liberation by fans and demonized by critics as a volatile and dangerous creation. However, they have never been out of the headlines for so long. On November 30, their price hit an all-time high of 19,850 USD (8). According to the experts, the jump was because of the wave of money from private and institutional investors, spurred on by the on-going COVID-19 pandemic.
There is some mystery around cryptocurrency. Satoshi Nakamoto (9), the pseudonym used by the presumed person or people who developed Bitcoin, built and deployed its original implementation software and conceived the first blockchain database.
The concept of digital monies like Bitcoin that people send online is not that complicated. After all, it is all about transferring money from one online bank account to another.
Here, these cryptocurrencies use blockchain technology, a method to send data in cyberspace for transfer. It is different from currencies like pounds and dollars since cryptocurrencies are decentralized. It means that they are not regulated by any financial authority like central banks or a government.
It brings some advantages since they are global, it means that they have the same value in every country. Such a feature makes them much easier to transfer from one person to another across the globe without the headache of exchange rates.
However, Bitcoin’s big disadvantage is that it is shockingly volatile, and reportedly, people had to wait to get their cash out due to technical snarl-ups.
Its price has climbed steadily since September 2020 because of the demand from investors and news that PayPal will allow US customers to purchase and sell the cryptocurrency within its app in the upcoming year (10).
As of December 15, 2020, one bitcoin cost is 19,201.60 USD. And experts are predicting that it would soon top 20,000 USD (11). However, the cryptocurrency got near that feat at the end of 2017 before collapsing in 2018.
Bitcoin’s extreme volatility is the most defining factor of the cryptocurrency market. For instance, if you had invested in bitcoin at the start of 2020, you would be sitting on a 163% profit in December. On the other hand, if you had invested at the start of 2018 and sold in December, you would have lost over 73% since the bitcoin price had collapsed.
Many wonder about the market forces, which drive these prices up and down so wildly. However, these currencies’ value is like anything else, linked to supply and demand and competitors’ numbers. It is often difficult to determine the exact influencing factors of its erratic performance. It makes digital currency all the more risky investments!
Before you decide to invest in crypto, ponder first whether you would like to purchase a house in a city where there is just about 75,000 people and is one of the places with the most unpredictable weather on earth. It is a city where snow blizzards and summery thunderstorms occur without any warning, and everything cools down again with a dramatic temperature rise on the very next day. This city’s weather is a metaphor to describe bitcoin’s behavior; it can be total bonkers.
If you invest in Bitcoin, make sure you are prepared to lose some or all of your money. Cryptocurrencies are not your conventional investing.
Since regulatory are not watching cryptocurrencies, it adds another risk layer to it. Hence, several authorities called it a ‘Wild West Industry.’ Notably, from January 6, 2021, the Financial Conduct Authority, the UK (12), would ban the sale of complex derivatives that speculate on cryptocurrency movements. It means that companies are prohibited from offering retail customers contracts for difference, spread bet options, futures, and exchanges traded noted, focusing on digital currencies.
Andrew Bailey, Bank of England governor (13), recently stated that he is very nervous about people using bitcoin for payments. Previously, he had warned that cryptocurrency investors should be prepared to lose all their money.
No doubt that bitcoin is at the very high-risk end of the investment spectrum. The price of cryptocurrencies is volatile as some can go bust and could also be scams, and occasionally one may increase in value and produce a return for investors.
“Cryptocurrencies could remain niche, become mainstream, vanish without trace or anything in between, and any investment should be considered as very high risk.”
– Danny Cox, Hargreaves Lansdown (14).
As with any investment, people need their due diligence. Don’t pin all your hopes on one cryptocurrency; spread your money around, so you also spread the risk.
Should you buy Bitcoin as an Investment?
More and more investors are getting some exposure to bitcoin and other cryptocurrencies. It is what has been driving its rapid appreciations. So while you may want to add some to your portfolio, you should not have a large amount of your portfolio in cryptocurrency,
Today, buying bitcoin has become increasingly easier for investors, with the mass adoption driving the prices up. Firms like PayPal are now making it extremely easy to purchase bitcoin, which on top of making it easy for people to buy, is one of the main catalysts of its soaring price today (15).
So don’t wait any further and kick off considering and gaining exposure to bitcoin and taking a short position while being careful.
It is crucial to focus on the long-term and the big picture. If you have faith in it, you know it is the worst time to panic and sell, and the best to keep holding or, better yet, buy more.
Another alternative is to engage in trading. However, only if you have the right skills to do so. In these difficult times, especially when the price tends to be quite volatile, trading can be a very profitable endeavor (16).
When trading, remember that you can’t always be to the point. Even the best traders are delighted if they are right slightly more than 50% of the time. There is always some good period and some bad period as the market will catch unaware and surprise you with sudden unexpected shifts up or down on a long-term basis.
However, it does not matter how often you are right or wrong; what matters is how much you make when you are right and how much you lose when you are wrong.
People have to have that ratio right. One could be right only 30% of the time and still make a lot of money as long as one makes three times more on his right predictions as one does on his losses.
Considering the huge upside potential and promise for Bitcoin, the easiest and most fool-proof strategy right now is to purchase Bitcoin and safely store it. Hold for a few years, and if all goes as per the ideas exposed above, you will be enjoying a nice surge in your net worth (17).
If Bitcoin can remain decoupled from US Equities & the market treats it as Digital Gold, 2020/2021 should be an amazing BTC cycle. Always follow the present strongest force that drives market direction; presently, the demand side is fueled by funds & retail Money (18).
The Less Risky Way of Crypto Investment
‘Stablecoins’ could be a less risky way to invest in cryptocurrency, as per Gavin Brown, an associate profession in financial technology at the University of Liverpool.
“Stablecoins continue to develop and be the potential solution to the problems of volatility and credibility for crypto assets. In contrast to cryptos, stablecoins have actual assets behind them, like regular currencies.”
– Gavin Brown (19).
DAI and TUSD are two such currencies, backed with the US dollar. One coin is worth 1 USD. DAI is hosted on the MKR, Maker platform, and crypto platforms to be safer to invest in than the actual currency. It makes risk low, but the gains are also very low or nil.
Tether is one of the largest stablecoin, backed by one dollar per coin. It was bounced back during the pandemic’s first lockdown. It maintained its postion but more than doubled its market value, from 4.6 billion USD to 9.2 billion USD. As of December 25, 2020, its market value is about 19 billion USD.
However, according to Brown, investors should not see tether as the next big thing. He points out that in theory, it would never be worth more than one dollar. However, it is potentially an interesting option for any varied portfolio to include tether since it offers a slice of stability if other things start to suffer.
Brown added that it is also less risky to make long-term investments in firms associated with cryptocurrencies. For instance, Facebook shares are planning to roll out a currency called Diem, formerly Libra, or JP Morgan, with the digital JPM coin equal in value to the US dollar. Another is the bank Wells Fargo, which is developing a US-dollar linked stablecoin (20).
NOTE: Investing in Cryptocurrencies such as Bitcoin is highly risky and neither TimesNext nor the author promotes the investment in such assets. The investors are advised to do proper research and analysis before putting in their hard-earned money into any such asset.