Should I Invest in Bitcoin is the question on every investors lips, SEARCHING FOR information on YouTube about bitcoin will immediately lead to a flood of promotional videos, some with Bill Gates’ face on the logo and a “Bill Gates talks about bitcoin” tagline. Not surprisingly, when you click on it you won’t find Bill Gates or Warren Buffett, but the same message of “hop on the bitcoin wagon before it’s too late.”
Should you invest in bitcoin? Here are some details a potential investor should know.
First of all, bitcoin is one of about 1,500 digital currencies available and is most well-known since it has the largest market cap. Bitcoin was created to undermine the bank-dominated financial system and to streamline capital market activities. It was “mined” via supercomputers by programmers incentivized by an award of bitcoin, mostly located in areas like Inner Mongolia and Ireland, wherever electricity is cheap.
Bitcoin looks like an investment tool. It has a price against the dollar and is traded. There are bitcoin exchanges, brokers, bitcoin futures and a bitcoin index fund. You profit from buying low and selling high. But investing in bitcoin is not like investing in stocks and bonds.
Investors buy stocks and bonds because they bring in future cash flows, interest and principal income in the case of bonds and dividend for stocks, and capital gains from a possible increase in price in the future. But bitcoin’s only source of return is price increase.
Well, you may argue, there are firms who never pay dividends, many of the tech companies, and bitcoin is kind of like them, where capital gains is the sole driver of returns. But here’s the essential difference: the future price of non-dividend paying stocks are backed by the company’s potential to grow its profit. It has cash flow, whereas bitcoin has none. The only thing it can offer is the belief that someone will be willing to pay more for it in the future.
Is bitcoin a currency? There are legitimate reasons to hold some non-dollar currency or non-dollar denominated financial assets in your portfolio. For example, you may want to diversify investment in anticipation of potential dollar depreciation.
A currency needs to be a store of value, an instrument of exchange and a unit of account. Among the three, the unit of account is considered the most important function of a currency. It means the currency has to be well-circulated and accepted by a large swath of people for a wide range of transactions. As pointed out by Mark Carney, governor of Bank of England, bitcoin has failed that definition. Not only does its volatility make it a poor choice for store of value, its constrained capacity to process simultaneous transactions as compared to payment system likes Visa (ticker: V) and MasterCard (MA) – along with the high fees one needs to pay to get the transaction go through and get booked on the ledger book – greatly hamper circulation.
Visa can process up to 65,000 transactions per second globally against just seven per second for bitcoin.
What determines bitcoin’s price? At the end of last year, bitcoin was traded at about $18,000. Now the price is less than $7,000.
Once the bitcoin futures market was established traders who have negative views about bitcoin entered the market, pushing the price down. Since there is no cash flow attached to bitcoin, the traditional asset pricing method won’t apply.
Bitcoin’s price is determined solely by supply and demand. On the supply side, unlike the dollar, whose supply is controlled by the monetary policy of the Federal Reserve Bank, bitcoin’s supply is pre-programmed by its creator. It will top at 21 million.
On the demand side, it’s fueled by the anticipation that the price will increase. Bitcoin’s jacked-up price has been driven by the belief that increasing demand will chase the limited supply. If the current inefficiency in bitcoin as a payment method doesn’t get fixed and if the price of bitcoin remains volatile, it won’t become widely adopted as instrument of payment. Neither will merchants adopt bitcoin as unit of account. Then demand for bitcoin will remain only speculation-driven.
How risky is investing in bitcoin compared to other financial assets? Go into bitcoin if you can bear the downside, take the risk and join the billionaires . If you are fine with using all your capital and you are curious about bitcoin, and you believe that the demand for bitcoin is still going strong, then do it.
Introduction of a new class of financial assets that are meant to draw individual investors in to cryptocurrency at the current stage is high. The opportunity to trade the bitcoin index fund without having to own bitcoin itself will accelerate speculation. The cryptocurrency index funds are offered on crypto exchanges where you can trade a basket of cryptocurrencies. But combining speculative currencies into a basket is not going make them less speculative. The downside is still too huge and dwarfs any diversification benefit, and they charge a 2 percent management fee at the very least.
In addition, financial firms are trying to launch bitcoin exchange-traded funds traded on stock exchanges, but have not gained approval from SEC yet. The SEC’s major concern is to protect retail investors from price manipulation.
On June 6, VanEck and SolidX refiled with SEC their updated proposal of bitcoin ETFs. To mitigate SEC’s concerns about volatility exposure to retail investors, they make the share backed by real bitcoin and price the ETF per share at 25 bitcoin, which equals about $162,000, in a way to target institutional investors. But the ultimate goal is still to make the ETF accessible to retail investors.
If you are interested to get into blockchain, the technology that makes bitcoin feasible, that makes more economic sense because it has applications beyond the financial industry and can be adopted by companies to create local blockchains.
But it’s not that easy to invest in blockchain technology because, at this early age, many companies that specialize in blockchain are privately held firms. In February, IShares started three blockchain ETFs but these will be much riskier than other ETFs of other industries.
As with any booming technology, companies who pioneer the applications will face significant challenges, as they are navigating into unfamiliar territory. Sure, there will be legends created, but there will also be numerous losers along the road.
In conclusion my advice is that you Invest in Bitcoin now, it’s better to be late than to be late. Always make sure you invest with a LEGIT BITCOIN INVESTMENT SITE to being ripped off by scammers.
Disclosure: Opportunistic fraudsters are taking advantage of this market, offering investments in cryptocurrencies and doing everything they can to defraud unsuspecting victims, Anyone who invests in cryptocurrencies should thoroughly research the company they are choosing to invest with to avoid scams.
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