Bitcoin investing has been in a league of its own. The incredible surge in 2017 is unbelievable. This spike in price surprised previously clueless consumers that Bitcoin was initially perceived as just a passing trend.
However, every week the value of bitcoin investments has taken a huge step from just US$0.06 in July 2010 to over US$17,000 in December 2017, and reached the figure of US$16.071 in November 2020.
If you paid $100 worth of bitcoins for pizza in 2010, it would be worth $28,341,266 in fiat currency today. This incredible rise in bitcoin raises the question: should we invest in bitcoin?
Controlled supply vs demand
The supply of bitcoins will never be more than 21 million coins. There are currently around 16.6 million coins in circulation with around 4-5 million coins remaining to be mined. It is estimated that it will take about a hundred years or so to mine the last bitcoins.
Hence, the price of bitcoin is purely driven by the demand for its limited supply.
Even in an era of fast-moving technology, where better solutions can often succeed and replace pioneering investments, Bitcoin has the allure of a decentralized network effect that governs its intrinsic value and enhances its security features.
If you want to compare it to traditional assets, this method won’t work, especially when we tend to always define value in US dollars.
But you can draw more similarities between bitcoin and vintage cars or fine art; or even gold for that matter. Because fiat currencies are backed by the government or the assets and economic strength of the issuing country, they can fluctuate based on the economy.
Effect of recession on bitcoin development
Many people believe that the economic recession of 2008 was what gave confidence to investments in bitcoin and other cryptocurrencies. So if you have bitcoins in your portfolio, here’s what you can consider.
Nearly a third of millennials say they prefer bitcoin investments to traditional investment options such as government bonds and stocks. A well-diversified portfolio is always better than a concentrated portfolio.
Most of us only have stocks and mutual funds and REITs in our portfolio. In cases like these, adding cryptocurrencies can provide a hedge against an economic downturn.
Keep in mind that due to the volatile nature of cryptocurrencies like bitcoin, you should invest only up to 10% of your entire portfolio. This helps you take advantage of the momentum and protects you from panic selling when the price drops.
At this stage, bitcoin investment is a type of investment that guarantees risk-averse investors.
Understand: why invest bitcoin?
The main purpose of bitcoin is to provide a decentralized form of anonymous transaction value, to eliminate intermediaries (banks and financial institutions) and thereby reduce the costs of transacting money.
The problem now is that with the massive adoption of bitcoin, transactions have slowed down significantly and the fees have skyrocketed. This poses a fundamental problem as it deviates from the original roadmap.
While most people who started using bitcoin used a peer-to-peer form of money , there are people who believed in bitcoin so much that they now consider it the digital equivalent of gold.
Currently the bitcoin price is hitting new highs every week, defying skeptics and sparking a frenzy on social media. It turns out that many people want to treat bitcoin not as an everyday currency but as an investable security like gold or silver.
Even billionaire investors advise investing only with money we can afford to lose.
Can bitcoin help you beat inflation?
Some financial experts believe so. One of the main characteristics of an asset class that beats inflation is the equality of supply and demand.
If the central bank increases the money supply too quickly, it causes inflation because there is only a certain amount of goods available for sale even though the money supply rises.
Bitcoin and gold, both are available in limited quantities. The US dollar or any other currency is currently considered fiat money with nothing to back up its value like gold used to be.
More and more people living in economically and politically troubled countries are turning to bitcoin as their solution to an out of control economy.
Citizens of countries like India, Venezuela, Argentina and Zimbabwe have lost faith in their local currencies and are seeking refuge in bitcoin or Dash.
Bitcoin is a demand-backed currency that gives global internet consumers a sense of financial decentralization. We will see massive volatility in the coming days. This is unavoidable.
The key to thriving in the chaos of the wild crypto world is staying rational. So, you can invest bitcoin in small amounts. Remember, you don’t have to own all the bitcoins. You can have only a small part.