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You might see bitcoin trading at $40K, $50K, $60K and think it’s too expensive to invest in.
This article will explain why evaluating bitcoin’s affordability based on its price is misleading.
Is Bitcoin Too Expensive to Invest In?
People often erroneously think they have to buy an entire bitcoin if they want exposure to the asset.
However, you can buy a fraction of a bitcoin.
A bitcoin is divisible down to a hundred millionth of a bitcoin, where the smallest unit is called a Satoshi, and 100,000,000 Satoshis are equivalent to 1 bitcoin.
You can invest in bitcoin for as little as $1.
Bitcoin & Unit Bias
A $50K price tag might cause a person to look for “less expensive” investments if they’re unaware of bitcoin’s divisibility.
This is an example of unit bias.
Humans tend to evaluate ownership in whole units instead of overall ownership.
For example, a person sees that one unit of bitcoin costs $50,000 and one unit of Apple stock costs $170. They assume that Apple is “less expensive” than bitcoin.
They fell victim to unit bias. They should consider how much of the bitcoin / Apple pie they own.
Let’s say one person owns 0.5 BTC, and his neighbor owns 10 shares of Apple.
The bitcoin holder owns a larger percentage of his respective market, even though he owns a fraction of a unit and the Apple shareholder owns 10 whole units.
In fact, for each respective market, owning half a bitcoin represents the same level of ownership as 390 AAPL shares.
Understanding Bitcoin’s Divisibility
Bitcoin’s frictionless divisibility is a result of being digitally native.
When it takes you to blink, you can divide your bitcoin into a hundred million pieces and send those pieces all over the world.
The network treats fractional amounts of BTC the same as whole units – there is zero loss.
Fractionalizing other store-of value-assets, like gold, art, or real estate, for example, is not as easy or even practical in some cases.
Gold’s shortcomings in the divisibility and portability categories led to paper claims on gold, then eventually paper claims on nothing.
Separating your rare painting into four pieces may reduce its value.
And who wants to sell one-tenth of their home?
These analog store-of-values have limited optionality, compared to bitcoin, because they exist in the physical space.
>> Related: Is Bitcoin Better Than Gold?
Valuation Perspective: Is Bitcoin Too Expensive?
Now that we’ve discussed why bitcoin is not too expensive to invest in from a per-unit perspective let’s analyze it from a valuation perspective.
If you’re looking to optimize an entry point, there are several ways you can determine if bitcoin is too expensive based on its previous market behavior.
However, trying to time the market is not recommended, and simply dollar-cost averaging into this volatile asset might be your best option.
Regardless, here are some metrics you can use to see if bitcoin is running hot:
- Bitcoin Fear & Greed Index
- Market Value to Realized Value (MVRV) Ratio
- Changes in Long-Term Holder Supply
Bitcoin Fear & Greed Index
The Bitcoin Fear & Greed Index attempts to measure the level of fear or greed in the Bitcoin market on a scale of 0 to 100.
High values suggest a greedy market and will likely coincide with high bitcoin prices.
If you’re looking for a “less expensive” time to buy bitcoin, consider times when the index shows “Extreme Fear” in the market.
The Market Value to Realized Value ratio compares the current market value of the Bitcoin network to the aggregate price paid for all coins in history.
An MVRV ratio of 1.00 means that bitcoin is trading at “fair value.” The degree that it extends above or below 1.00 indicates how much of a premium or discount it’s trading at.
Bitcoin rarely trades below 1.00, and it may never again.
Low MVRV ratios between 1.00 and 1.50 have historically been more favorable times to enter the market, whereas values between 2.50 and 5.00 have been expensive times.
Long-Term Holder Supply
An increase in Long-Term Holder (LTH) Supply suggests that the smart money market participants add to their stack.
They tend to accumulate coins during bear markets when others are fearful aggressively.
Following the LTHs may help you enter the market at an ideal time.
>> More: Best Time to Buy Bitcoin
Is BTC Too Expensive: Frequently Asked Questions
Are bitcoins too expensive to buy?
It’s possible to buy a fraction of a bitcoin. You can buy as little as $1 worth because a bitcoin is divisible into a hundred million units.
Is Bitcoin a good investment in 2022?
Bitcoin is a good investment in 2022 if you seek to preserve your purchasing power in hard-money assets. Allocating just a small percentage of your portfolio to bitcoin has proven an effective investing strategy.
Bottom Line: Is Bitcoin Too Expensive to Invest In?
Whether you discovered it at $200 or $60,000, everyone thinks they “missed” bitcoin.
Fortunately, bitcoin’s divisibility allows you to invest any amount of USD you’d like in it, regardless of its price for a whole coin.
- Why is Bitcoin Volatile?
- Best Time to Buy Bitcoin
- How High Will Bitcoin Go?
- What is Bitcoin Backed By?
- Is Bitcoin an Inflation Hedge?
This article is for informational purposes only. It is not intended to be investment advice.