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The Bitcoin conversation has never been louder. Bears are becoming bulls, and just about everyone has an opinion. Or at the very least, they have a lot of questions.
This article will address the elephant in the room: is bitcoin a good investment? The results may be surprising.
The Invention of Bitcoin
Bitcoin was invented in 2008 by the anonymous person, or group of people, known as “Satoshi Nakamoto.” The pseudonym described how technology known as “blockchain” would create a decentralized network to enable peer-to-peer transactions, without the need for a third-party approval.
Bitcoin attracted people seeking more control over their finances. And here is why:
- They could buy and sell their digital assets anywhere and anytime.
- Consumers were in charge of keeping their wealth secure.
- They were not subject to inflation by government order.
Learn More: How to Buy Bitcoin
Price History of Bitcoin
Bitcoin began to take off in 2013, starting the year around $13.50 per bitcoin. The first noteworthy rally and associated crash of bitcoin occurred in April 2013. It reached heights of $220 before falling back down to $70 in a few weeks.
The price began to climb again in the fall of 2013, starting at $100 in October and nearly doubling by the end of the month. However, Bitcoiners had seen nothing yet.
In November 2013, Bitcoin went from $200 to over $1075 by the end of the month. This take-off was fueled by the rise of bitcoin exchanges and miners in China.
At the time, over 70% of all bitcoin transactions were handled by one exchange, Mt. Gox, and this single point of potential failure made crypto traders nervous. Once rumors of poor security and management at Mt. Gox surfaced, the market got spooked, and Bitcoin experienced a 29% sell-off in just a few days.
Bitcoin recovered in the following month and found its footing around $920 in January 2014. However, the crypto community’s concerns with Mt. Gox came to fruition as the exchange filed for bankruptcy protection in February 2014.
Bitcoin’s price was nearly cut in half to $580 by mid-February and began its slow decline for the rest of the year. Bitcoin traded around $315 at the beginning of 2015.
Once again, the currency rebounded and experienced some spikes in the fall of 2016, reaching as high as $460. After some sell-offs in 2015, Bitcoin’s price increased gradually in 2016 and broke through $1000 in early 2017.
The price went from $5,000 in October to $10,000 just a month later, and fear of missing out increased by the day. On December 17, it eclipsed $19,783 per bitcoin. However, the price fell rapidly over the next few weeks, getting as low as $7,000 by April 2018.
Bitcoin experienced an 80% pullback from its all-time highs and reached $3,500 in November 2018. The currency rallied all the way to $10,000 in 2019, before experiencing another 25% pullback to $7,500 to close out the year.
2020 has been the year of Bitcoin. It started the year around $7,200 and will close the year around $30,000 levels.
Is Bitcoin Risky?
As you can see, the volatility of Bitcoin is unlike any other asset (or cryptocurrency). However, it refuses to die. Its ability to come back after massive collapses in price has turned many skeptics into believers. This section will explore why Bitcoin is inherently volatile.
Cryptocurrencies invite speculators looking to capitalize on their volatility. This is one of the reasons why Bitcoin’s price swings so much. There is no regulation and people are free to trade at all hours of the day.
Answering whether or not Bitcoin is too risky of an investment depends entirely on the individual’s investment goals. If the thought of Bitcoin pulling back 50% keeps you up at night, it might not be the best investment for you.
However, more and more financial advisors are adopting the 1%-5% thesis of investing in Bitcoin. One day, it might even be irresponsible for money managers to not have exposure to Bitcoin.
Bitcoin has been one of the best-performing assets of the decade. Even having just 1% of the portfolio in it can pay off massively.
Related: Is Cryptocurrency Safe?
Bitcoin vs Other Assets
Bitcoin is another way to diversify your portfolio. Most people’s investments are entirely tied to the performance of the stock market. Few have the time, effort, or money to diversify into uncorrelated assets such as rare art and wine collections.
Bitcoin is different from other assets. It does not have earnings reports or fundamental analysis that could indicate a price target. This is another reason for its volatility; it doesn’t trade on the same indicators (algorithms) used by Wall Street.
Often, Wall Street agrees on a price target for a stock, and there isn’t too much variation from bank to bank. These prices are determined by several factors like expected growth, earnings, and other general market factors.
Market conditions still affect Bitcoin- like its fall in March 2020 as investors went to cash in preparation for who knows what- but to a lesser degree than a corporation that must handle marketing, public relations, and beat expected earnings every quarter.
Learn More: What is Blockchain Technology?
Bitcoin Has Mastered Authentic Storytelling
There are a handful of stocks that have nailed the storytelling part of marketing. Apple was one of the first companies to harness narrative power, telling its customers to Think Different and why buying a Mac computer made them special.
Tesla has accomplished the same, but with an advertising budget of $0. Elon Musk has been painting pictures for years of how his battery-tech and AI-enabled products will change the world as we know it.
Tesla is barely profitable, but its stock is up more than 700% in 2020 because investors are buying the story. Bitcoin benefits from levels similarly.
Does Bitcoin have an advertising budget? No. And it didn’t crush Q3 earnings expectations or announce the launch of a new product.
The mystique of Bitcoin benefits its narrative. Crypto purists claim it can solve just about every problem on the face of the Earth. But regardless of whether or not the Blockchain can solve world hunger, it has captured the power of a good story.
Bull Case: Is Bitcoin a Good Investment?
#1. Bitcoin has a Fixed Supply
Bitcoin is a deflationary asset because it has a fixed supply. There are currently 18.5 million in circulation, but there will only ever be 21 million bitcoins in the world. A fixed supply is created each year, and estimates suggest the last coin will be mined in 2140.
The advantage of owning a naturally deflationary asset is that it hedges against inflation. And inflation looks like it will run rampant in the U.S. in the years following the Covid-19 pandemic.
The Federal Reserve has printed trillions of dollars out of thin air to stimulate the stock market (oh, and the economy). This kind of money printing is unprecedented, and concern for the dollar’s purchasing power is warranted.
#2. Gold 2.0
Before Bitcoin, investors may have fled to gold to preserve their capital. But gold is not truly scarce. More than 66% of above-ground gold has been mined since 1950. The supply of gold is actually unknown.
Additionally, acquiring and transporting gold is more difficult than Bitcoin. Bitcoin has commonly been referred to as “Gold 2.0” because it is superior to gold in many of the factors that make gold special.
It’s better at being scarce. It’s easier to move and more divisible. Bitcoin is easier to own and verifiable, making it less susceptible to counterfeit. Plus, millions of people agree that it’s valuable, and its mainstream adoption increases by the day.
Suppose institutions continue to embrace Bitcoin, and a small percentage of gold’s $9 trillion market share continues to switch into Bitcoin. In that case, bitcoin’s price can appreciate to hundreds of thousands of dollars.
#3. Central Banks
Additionally, a similar price appreciation can play out if central banks converted just 10% of their fiat foreign exchange reserves into Bitcoin. A combination of the gold framework thesis and bitcoin displacing a small portion of the 11.7 trillion dollars in government reserves would increase Bitcoin’s price astronomically.
Not to mention the number of publicly traded U.S. corporations who have begun holding bitcoin as a treasury reserve asset. Microstrategy (ticker: MSTR), a business intelligence company, shifted its balance sheet into bitcoin. It now has more than $1.1 billion worth of exposure to Bitcoin.
Jack Dorsey’s Square Inc. bought $50 million of bitcoin and insurer MassMutual bought $100 million of the world’s first cryptocurrency. This trend from corporate America seems to just be getting started.
Bear Case for Bitcoin
#1. Unfavorable Regulation
Undesirable regulation can come into the crypto space and handicap the industry’s growth. While there are Bitcoiners in the U.S. Senate, other lawmakers are looking to regulate the crypto ecosystem.
Such regulation may make the advantages of owning crypto obsolete, such as the anonymity or the benefits of decentralized governance.
#2. Bug in the Code
Additionally, Bitcoin is code and still subject to bugs in the software. This dooms-day scenario is unlikely to happen. The future of Bitcoin’s code will likely resemble its flawless decade thus far.
#3. Is bitcoin a Ponzi Scheme?
Some argue that Bitcoin is the greatest Ponzi scheme in history. The notion of a small number of people owning a large portion of the supply is not ideal for Bitcoin’s decentralized narrative.
It is rumored that Bitcoin’s creator, Satoshi, owns more than 1.1 million bitcoins. Bitcoin’s anonymity obviously does not require disclosures from individuals or institutions that show how much they own.
If enough whales were to conspire, there aren’t regulations that would stop them from colluding and ultimately controlling the price.
How to Invest in Bitcoin
Bitcoin’s infrastructure has taken off in recent years, and it has never been easier to invest in it. There are hundreds of crypto exchanges to choose from that offer different products, cryptocurrencies, and security levels.
Choosing the right exchange can be difficult but understanding your own reasons for getting into Bitcoin may help you decide.
If you are just looking to trade its volatility and don’t ever plan to own the underlying asset, then Robinhood will probably be sufficient.
If you are attracted to the space for its decentralized nature, then you’ll appreciate the services offered by Bisq.
Moreover, if you want exposure to Bitcoin but are still skeptical for security purposes, open an account with the fortress Gemini and rest assured that your crypto assets are safe and insured.
Investing in Bitcoin is as easy as opening an account with a crypto exchange, funding it, and buying the digital asset. We suggest Gemini due to its security and reputation.
Learn More: Best Cryptocurrency Exchanges
You will pay a small fee to buy and sell Bitcoin on every exchange, like Coinbase. While these fees vary by platform, they typically range from .10% to 4% depending on the amount of Bitcoin you are transacting.
Some crypto commentators predict these fees will be removed in the future, just like commission fees with stocks were phased out after Robinhood revolutionized retail investing with commission-free trading.
Alternative Play: Invest in Blockchain Technology
Bitcoin runs on a decentralized network known as the Blockchain, that uses cryptography and mathematical proofs to ensure its security. However, blockchain tech can be used for many other things, like identity management and supply chain optimization.
Most tech companies are designing blockchain solutions that will power the future. Experts suggest that this adoption is still years away because it requires shifting the existing foundations that many companies operate on.
Several small companies specialize in Blockchain and conglomerates like Google and Visa are beginning to enter the market. However, a handful of Blockchain ETFs provide exposure to Blockchain and minimize the risk of holding individual stocks.
1. Amplify Transformational Data Sharing ETF (BLOK)
BLOK’s largest holdings include Silvergate Capital, Square, Microstrategy and PayPal. These top holdings suggest BLOK is concerned with Blockchain’s impact on financial services and banking infrastructure. It carries an expense ratio of 0.70% and is up 87% in 2020.
2. Siren Nasdaq NextGen Economy ETF (BLCN)
BLCN’s largest holdings are Canaan Inc. ADR, Galaxy Digital Holdings, and Square. These holdings suggest BLCN may focus more on developing Blockchain itself, instead of picking companies that Blockchain will benefit. For example, Canaan Inc. is a developer of supercomputing chips and digital blockchain computing equipment.
The ETF carries an expense ratio of 0.68% and is up 59% in 2020.
Learn More: Best Blockchain ETFs
Bottom Line: Is Bitcoin a Good Investment?
The answer to this question ultimately depends on your risk tolerance and investment goals. But let’s explore some practical approaches to investing in Bitcoin.
If you’re okay with some risk and are looking for an asymmetric payoff, then Bitcoin may deserve 5% of your portfolio. Or 10%. It’s up to you and what lets you sleep at night.
If you’re risk-averse but sick of missing out on bitcoin gains, then how about a 1% allocation? If you’re reading about a cryptocurrency, you’re probably financially secure enough to handle the worst-case scenario of 1% of your portfolio going to zero.
We might still be in the bottom of the first inning with Bitcoin. Like any investment, it can go to zero. But it’s pretty difficult to find an asset with a higher upside.
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