Investing in Bitcoin – is it really worth it? In this article, we will look at the suitability of bitcoin as as investment.
The cryptocurrency has really caught attention of small-time and big investors alike. Since the financial crisis, it has returned enormous amount of money on capital and that trend seems to be continuing.
If you had had the foresight to invest $1,000 in 2012 Bitcoin, it would be worth a cool $16,132,000 today – that is a 1,600,000% increase in value. The S&P 500 index only returned 75% during the same time period.
Blockchain Technology And Bitcoin
Before we delve into investing in bitcoin, lets look at the technology behind the currency and the currency itself.
Bitcoin is based on blockchain technology. The blockchain functions as a digital ledger which records all transactions in the chain and records them automatically on the ledger.
If you send someone money for example, the amount you send them will be recorded automatically in the ledger.
Bitcoin is decentralised. This means it can function without the need for third-party financial institutions. Today, financial institutions act as intermediaries between two parties engaged in a monetary exchange. Blockchain technology means we would no longer need third parties. We could carry-out financial transactions between two parties without the third party.
Bitcoin is simply an extension of this idea. It is a highly secure peer-to-peer payment system. The transactions that take place in Bitcoin are verified by network nodes and recorded on to the Blockchain.
The system itself is very secure from cyber attacks. The system uses a record-keeping service known as Mining which makes it almost impossible to disrupt.
The technology itself is very complicated and probably not worth explaining in full. The most important point is that the technology is de-centralised.
Investing In Bitcoin
This technology has therefore attracted a host of users, drawn to the the decentralised payments system. The steady increase in users has pushed the value of Bitcoin up in the last five years. The rapid and ever-growing influx of new users has pushed the price up from $.08 per bitcoin to $16,000 per bitcoin today.
These returns have attracted a frenzy of speculators. Their interest has begun to drive the value of Bitcoin up even further.
Despite these gains, it is still practical to ask whether you should join in the frenzy of investing in Bitcoin? Lets look at some of the positives and negatives.
Positives Of Investing In Bitcoin
Liquidity & Scalability – one key draw for bitcoin investors is its scalability. Most investments are hindered by scalability at some point. If you invest in a company, it takes time to expand your offices and to grow your revenue. There are no limits with Bitcoin however. If 100 million people all bought $1,000 today and the price would instantly surge. The $2,000 value could easily increase to $100,000, if investors saw value in using the currency. Investing in a highly liquid asset means you can access your money at any time during the day. This means that you can take your money out of the market very easily.
Disruptive – another draw for investors is the disruptive element. Blockchain technology eliminates the need for third-party financial institutions (banks, payment companies, etc). The implications for this are absolutely enormous and could potentially disrupt our market-based economy and the financial institutions that support it.
Inflation – bitcoin is not an inflationary currency like the dollar. A bitcoin worth $1,000 today would be worth the same in ten years supposing there are the currency does not experience rapid usage over this period. The currency is experiencing this, however this will level out over time. On the other hand, the dollar looses value every day because of inflation. in the last ten years, the dollar depreciated by nearly 20%. If you had $100,000 in 2017 and you left it under a mattress – you would only have the purchasing power of $80,000 today!
The Negatives Of Investing In Bitcoin
Unstable – today, bitcoin is a very unstable currency. There have been flash crashes in the past few years that have crushed investor returns. In April 2013, the price of bitcoin decreased from $266 to $50. From November 2013 to January 2015, the price gradually decreased from $1,000 to $200 in 14 months. A speculative environment can create a climate where there are huge winners, but also huge losers. If you invest $1,000 today, it could be worth nothing tomorrow. This is usually not the case with stocks. If you invest in Apple, you are investing in their piles of cash, revenue from their iOS platform (Apple Pay, In-App Purchases) and revenues from hard-ware sales. With Bitcoin you are not investing in anything, except an idea, or belief that the currency will be used more tomorrow than it is today. That is it.
Political Implications – bitcoin is a currency system that is fundamentally at odds with our market-based economy and the central-banks regulate the system. If the currency grows big enough, it will eventually begin to affect the value of national currencies. It is therefore hard to believe that national government are going to allow a currency which fundamentally undermines its own currency.
This is especially true in China. A recent article Coindesk estimates that China makes up nearly 80% of the bitcoin market. China’s own currency has fluctuated wildly in the past few years. Therefore it is easy to assume that Chinese investors have invested in bitcoin to protect their assets and make more money through speculative investments.
During this time of turbulence, the Chinese government have gone to great lengths to keep money in China and curb capital outflows. Money moving from Yuan to Bitcoin counts as capital outflows. If Bitcoin becomes popular enough to start affecting the national currency even slightly, the government is going to ban bitcoin outright. If this happens, the broad based of Chinese users will leave beginning a flash crash. There is no guarantee that this will happen. However, there is a guarantee that bitcoin prices will affect national currencies. When this happens, governments will probably ban its citizens from investing in Bitcoin.
A key argument for the adoption of bitcoin is that it will disrupt gold, but recent developments in China call this into question. Since the 2008 recession, the Chinese government has ramped up their gold holdings – currently $3 trillion. An investor has to ask himself. If bitcoin, or another cryptocurrency “disrupted” gold, could the Chinese government do anything about it? Afterall, it would affect the value of their reserves significantly. I think the answer would be yes. They could ban the currency outright, ban ICOs and they could refuse electricity to miners! I mention all these steps, because China has taken all of them essentially – the results have not been promising for crypto-fans in China!
Crypto fans push the myth that crypto is an unstoppable force that governments cannot stop. The situation in China shows that this is simply not true. Governments can shut everything down. If the two biggest countries in the world (US/China) have an enormous stake in gold, do you think they will simply allow a crypto-currency to take over without doing anything? I think that is extremely unlikely and China is a perfect case study to examine why this is the case.
Bitcoin is a poor investment decision. The volatility of the currency combined with potentially precarious future of the currency, make it seem unlikely that the currency will provide stable, future returns.
It is nothing more than speculation. Of course, you will hear of people profiting from trading, but everyone knows this is a crypto-boom. How long will it be before the good times end?
If you were really excited about crypto, you would invest in companies backing blockchain technology itself.
Blockchain technology really impressive and has the potential to change the world.
If you wanted to invest in blockchain technology, invest in a company that deals in many currencies and not just bitcoin. Somewhere like this would be a great place to start.
If you want to capitalise on bitcoin and you don’t have much money, start your own cryptocurrency and sell it it some poor unfortunate goon! Also, make sure to call it something that sounds legitimate and enticing. SleazeCoin has a nice ring to it.
If you want to make long-term returns, stay with index funds.