What is Bitcoin?
Is Bitcoin a good investment? To answer this question we should take a step back and discuss what Bitcoin is all about and how it has become so coveted. Bitcoin was created by Satoshi Nakamoto in 2008 in response to the unconventional monetary policy actions utilised by the Federal Reserve during the financial crisis. In order to save banks from collapsing, the Fed initiated quantitative easing, which is essentially the expansion of both the money supply and the Fed’s balance sheet, which Nakamoto regarded as undesirable and believed would debase the value of the dollar. The crisis exposed the need for a form of hard money that was decentralized, scarce and peer-to-peer, thus the idea of Bitcoin was born.
Bitcoin is decentralized and peer-to-peer in the sense that there is no central authority responsible for the movement of funds from one person to the next or the recording of the transaction history. Instead, Bitcoin utilizes blockchain technology which enables anyone with an adequate computer and internet connection to hold the widely distributed Bitcoin ledger containing the entire network transaction history which is frequently updated.
The network is maintained by ‘miners’ who compete to solve complex algorithmic puzzles. If successful, the miner will record a new batch of transactions called a ‘block’, the latest in a long sequential chain, hence ‘blockchain’ technology. The miners are rewarded for recording the transaction with newly issued Bitcoin and transaction fees and the entire global distributed ledger is instantly updated. This should provide some much needed information for customers considering “Is Bitcoin a good investment?”. We can also help you find a trusted and reliable place to buy Bitcoin, such as our Zeply review.
What makes Bitcoin valuable?
The invention of Bitcoin enabled individuals for the first time ever to instantaneously transfer money internationally without the need for a centralised institution. The utility Bitcoin offers in this regard is clear, however many might still be wondering why should I invest in Bitcoin when I could simply make the transaction in Bitcoin and then convert the funds back into my preferred currency? The answer lies in tokenomics, the monetary policy of Bitcoin.
Bitcoin was initially conceived as a form of digital cash, however the monetary policy underlying Bitcoin, perhaps initially underappreciated, drives the demand and supply dynamics that has seen it become one of the fastest appreciating assets. Bitcoin has a max supply of 21 million coins, of which approximately 18,5 million has been mined. The capped supply of Bitcoin is one of the major factors driving the price upwards as demand increases. As major central banks around the world are scrambling to prevent economic decline by creating new money, thereby diluting the currency you hold and diminishing your purchasing power, you can rest assured that Bitcoin’s protocol prevents its dilution.
The dynamics of Bitcoin mining also adds to its value. As more miners join the network, it becomes increasingly difficult for any individual miner to successfully mine a block. Thus they have to invest greater resources in order to succeed. Add to this, the fact that approximately every four years the block reward for mining a block halves. This is comparable to any precious metal. If sufficient demand exists and the difficulty of extracting the resource increases, then a commensurate price increase can be expected.
Bitcoin has thus evolved beyond a digital currency to a digital store-of-value, that can preserve your purchasing power while fiat currencies are eroded by reckless central bank spending. The ‘store-of-value’ status is often disputed due to Bitcoin’s price volatility, however when viewed on longer time horizons it has seen hyper appreciation, which makes it a highly desirable investment option.
Is Bitcoin a good investment?
When considering past performance, Bitcoin is certainly one of, if not the, top performing assets of the 2010s. It is a brand new technology which started from an incredibly low base price, making its growth difficult to compare with an established asset class like commodities or real estate. This is precisely why it is still such an attractive investment option. Asking ‘Is Bitcoin a good investment’ or ‘should I invest in Bitcoin?’ is similar to asking whether someone in the late 1990s should invest in Google or Amazon.
Unfortunately, we do not know if Bitcoin will be the Google or Amazon to rise out of the cryptocurrency space, but it is certainly best positioned at present to realise the potential of one aspect of blockchain technology. Large companies such as Tesla and Microstrategy have added Bitcoin to their balance sheets. They realise that cash is a depreciating asset due to inflation, the world is moving towards a new type of digital money and at present Bitcoin is on top.
We can expect many to follow the example set by these companies that have made enormous capital gains since purchasing Bitcoin. ‘Should I invest in Bitcoin now or later?’ is easily answered when you consider the stampede of businesses trying to get their share of the scarce digital commodity. Mass scale adoption may have the effect of reducing downside volatility as companies quickly buy up any dips in the market and hold their investments long term. However, this remains to be seen.
As an investment option Bitcoin does offer a few benefits for those wondering ‘is Bitcoin a good investment?’ should know about. Bitcoin has the potential to serve as a great hedge against inflation. With the advent of the Covid-19 pandemic and the subsequent fiscal stimulus attempting to bring some relief to those affected, economists and investors are becoming worried about an imminent and significant inflation in consumer prices. Investors seeking to retain their purchasing power will turn to assets such as gold or Bitcoin as a hedge against inflation.
Is Bitcoin a good investment if you want to hedge against inflation? Studies have shown Bitcoin to be uncorrelated with inflation levels, but its hyper-appreciation in the past has made it an excellent portfolio diversifier to counteract depreciation of purchasing power. Bitcoin is also uncorrelated with domestic markets and can therefore shelter individuals and companies from domestic market shocks.
A final worthwhile consideration is that the developing world is increasingly becoming connected to the internet by mobile devices. These nations often struggle with unreliable currencies and are burdened by inadequate financial infrastructure. Bitcoin has the potential to solve many of these problems as it enables the international transfer of money/wealth, it may be more stable certain volatile currencies and can greatly increase savings in the long run and serve as a currency for microloans and other financial services.
Controversies about Bitcoin
The most often cited controversial aspect of Bitcoin is the media’s attempt to brandish it a medium of exchange for criminals such as drug cartels and tax evaders. Bitcoin is more traceable than cash however, if the holders of certain Bitcoin wallets can be identified then the entire transaction history can be found on the blockchain. Not to mention that cash is the primary medium of exchange used by criminals, and thus this argument is seldom still raised. While this point is valid, it will not be applicable to most readers out there and you can rest assured that your privacy is upheld to the highest degree when you make use of a crypto wallet.
The primary challenge faced by Bitcoin seems to be mass acceptance by governments. China and Nigeria have banned Bitcoin, however their attempts to prevent its use has been largely ineffective. China remains the largest Bitcoin mining contributor in the world and Nigeria boasts the third highest Bitcoin trading volume. India too is seriously considering banning cryptocurrency and is suggesting a 3-6 month period for every Indian to liquidate their crypto holdings before the ban is instituted.
There have been many discussions regarding central bank digital currencies at Davos, which might explain the hostility towards cryptocurrencies. However, the separation from central authorities is one of the strongest appeals of cryptocurrencies which means they are likely to thrive even with the introduction of central bank digital currencies the world over. You will need to take these cases into account when you are considering, “Is Bitcoin a good investment?”.
Should I invest in Bitcoin?
The answer will vary for every person, but there are a few important factors you should consider before making your decision that relates not only to Bitcoin but to any asset class. Let’s talk about time horizons, liquidity needs and risk appetite so you can find your own answer to the ‘should I invest in Bitcoin?’ question.
If you are wondering is Bitcoin worth investing in, first consider your time horizon. If you only want to invest in Bitcoin for a few months or a year to make a quick profit, then it might not be worth your while. Today, there are hordes of cryptocurrency day traders who make their living by timing the market using technical analysis of price movements and exploiting volatility, but this is very risky and not advisable to anyone unfamiliar with the space. These markets can be very unpredictable and you may find yourself losing money if your time horizon is too short, which brings us to liquidity needs.
Is Bitcoin a good investment if you have high liquidity needs? Probably not. Liquidity in this context refers to ability to quickly convert your assets into cash. Real estate is an example of an illiquid asset as one has to go through the process of putting the house up for sale, finding a buyer, agreeing on the price, setting up the contract etc. before you can convert your asset into cash.
This liquidity need differs for every person. It is important to recognize that despite Bitcoin’s easy and quick conversion into cash, the volatility of the markets actually makes it an illiquid asset in the sense that the price may be in a correction at the most inopportune moment when you might be in desperate need of cash. Is Bitcoin a good investment if you do not have a rainy day fund? We would recommend it.
Finally, risk appetite. Markets reward and punish investors for taking on risk. Until very recently, it was still very uncertain whether Bitcoin would achieve mainstream and institutional adoption or whether governments would attempt to institute an outran ban on owning the asset class.
Those who asked themselves ‘should I invest in Bitcoin?’ and answered positively in the past 10 years have been handsomely rewarded for the potential they saw and the risk they took, assuming their time preference was long enough! With the momentum and institutional backing behind Bitcoin, the odds of seeing growth seem more likely than ever before. Although the risk levels of Bitcoin seem to be lowering greatly, risk-averse investors may want to steer clear. If you have an above average tolerance for risk, Bitcoin is the ideal investment opportunity as there is still massive upside price potential.
Is Bitcoin a good investment for you in 2021? If you are an individual looking to diversify your portfolio, with a long term investment horizon and with a reasonable level of risk-tolerance, Bitcoin remains a great investment opportunity in 2021. Trading apps like Zeply and Binance allow you to easily buy Bitcoin at the touch of a button.
Note that the market is currently in a bull run and is likely due for a correction, however with the widespread institutional adoption this expectation may not hold. A safer investment strategy than trying to time entry into the market is called dollar-cost-averaging. Investors allocate a small portion of their monthly disposable income to purchase Bitcoin regardless of the price to average out potential mistimed entries to the market.
Conclusion – Is Bitcoin a good investment?
If you are one of these millions wondering ‘Should I invest in Bitcoin?’ or ‘Is Bitcoin a good investment in 2021?’ this article should have provided you with the information to reach a conclusion. In summary, the growth prospects for Bitcoin are looking very strong in the next few years.
We can expect periodic corrections, but the momentum and institutional investment is working in Bitcoin’s favour. If you have a long term investment horizon, sufficient liquid funds and some appetite for risk, Bitcoin should still be a very attractive investment opportion in the current year.
Should I Invest in Bitcoin? FAQ
🤔 Should I invest in Bitcoin or Altcoins?
‘Altcoins’ is short for ‘alternative coins’ and refers to all cryptocurrencies other than Bitcoin. There is incredible potential in many cryptocurrencies, the reward for investing in these currencies may be higher than Bitcoin due to their smaller market capitalisations but you will also face more volatility. If you have a higher risk tolerance and are interested in altcoins head over to TradersBest.com to learn more about the top altcoin gems.
₿ Is Bitcoin a good investment on the crypto market?
Is it worth investing in Bitcoin? Bitcoin is one of the most popular cryptocurrencies on the market and plenty of traders have been drawn into trading it. Choosing between cryptocurrencies is a decision that will require as much research and information as possible. Luckily our team here at TradersBest.com has taken a close look at all the crypto trading options that are available on the market and detailed each of their offers to help you decide, “Should I invest in Bitcoin?”
🤑 What can I buy with Bitcoin?
Every day new companies are hinting at or enabling their users to purchase goods and services using Bitcoin, with Tesla being the latest example. Bitcoin is ubiquitous within the cryptocurrency space and nearly any product or service in that space can be traded for or purchased using Bitcoin. Visa has recently partnered with Binance and released a Binance card which enables you to convert your Bitcoin into cash at the point of purchase. It is increasingly becoming easier to purchase items with Bitcoin, however most institutions are beginning to recognise Bitcoin’s value as a store-of-value like gold rather than a currency.
📱 Should I invest in Bitcoin on my smartphone?
Depending on the online service provider you have chosen, you may be able to invest in Bitcoin using your mobile device. There are multiple online operators on the market and we take a look at just about all of their offers. At TradersBest.com UK, we offer insights and reviews on the best trading platforms as well as great tips on trading and investment.