Deciding whether or not to invest in Bitcoin is a subjective question. Investing in any asset has inherent risks, and it pays to research your options before making any commitments.
The cryptocurrency marketplace is one of the most volatile and speculative financial exchanges. The value of coins varies day to day, sometimes minute to minute. While most money markets are tough to predict, crypto is akin to the wild west.
There are literally thousands of coins available to trade but the most well known is easily Bitcoin. It has the largest market capitalisation of any cryptocurrency, more than double that of its nearest competitor.
Bitcoin’s current market cap is $618 billion, while Ethereum has a market cap of $300 billion. The next largest are stablecoins Tether at $98 billion and USD Coin at $75 billion.
So, is this the time to buy? Bitcoin seems to be in a slump and markets remain bearish. Pinpointing when sentiment will turn bullish, and getting in before the rise, is incessantly tricky. This is the goal of any currency, bond, stock, real estate, oil or minerals trader.
Is now the time to invest in Bitcoin?
One of the ways to determine if you should invest in Bitcoin may be to consider past performance. While not indicative of future results, it may provide some insight into what to expect.
Bitcoin was first introduced in 2009. In early 2011, the coin’s value had risen from US$1 to US$29.60, a gain of 2,960% in just three months. By mid-2019, its price had surpassed US$10,000. The cryptocurrency’s value was just below US$29,000 in December 2020, up 416% year-on-year. Less than one year later, Bitcoin hit an all-time high of US$68,789.
During the first half of 2022, Bitcoin’s price tumbled. As of mid-September 2022 Bitcoin was trading at approximately US$20,100. Traders have offered numerous explanations for this rapid depreciation but this sort of volatility remains prevalent within the industry and will likely persist until a more compelling and actionable use case has been established.
Even if you were to purchase Bitcoin at a low, ride one of its meteoric price hikes to big profits, and convert these to fiat currency, you may miss out on an even greater increase down the track.
The real question is, are you interested in risking your funds for short-term gains, or are you aiming to invest for the long haul with aspirations for practical application?
It might be advantageous to consider the pro’s and con’s of purchasing Bitcoin.
Potential advantages of investing in Bitcoin
Most cryptocurrencies are unstable assets, prone to significant market movements and vulnerable to abrupt abolition. Bitcoin has, so far, stood the test of time. It was the first digital asset to garner worldwide attention and continues to be the dominant currency, often influencing trading values across the entire marketplace.
Many altcoins’ exchange rates are priced against Bitcoin. This occurs for a number of reasons. Firstly, given Bitcoin’s superior status, it’s a popular store of value among traders.
Secondly, many global crypto exchanges do not offer crypto-to-fiat conversions because of regulatory and compliance issues plaguing digital currencies. Instead, they rely on Bitcoin as the primary market pair, encouraging traders to do the same.
Bitcoin is commonly used as a base currency for buying and selling alternative coins, similar to the way in which the US dollar is seen as a reserve currency for global stock traders.
Bitcoin operates on a decentralised peer-to-peer network known as a blockchain. It’s supported by more than one million miners that operate on a proof-of-work strategy to secure transactions. A tremendous level of data security can be achieved through decentralisation because a blockchain is typically stored identically in many locations, called ‘nodes’. All such nodes communicate within a network.
Imagine a bank that has a list of transactions securely stored in a database. A malicious user might modify the records in the bank’s database in order to steal funds. However, if a malicious user were to modify transactions on a blockchain, the changes would only occur locally at one node. This modification would be denied by the hundreds of other nodes on the network because it would have altered the information which links each new block to preceding blocks.
When Satoshi Nakamoto created Bitcoin, he capped the total number of coins at 21 million. This limit, known as the hard cap, is encrypted in Bitcoin’s source code and enforced by nodes on the blockchain. This network has no central server or similar authority calling the shots, eliminating the need for a middle man – in this case, the banks.
The University of Western Ontario released a paper in 2017 entitled, Bitcoin and the Rise of Decentralised Autonomous Organisations. The study provided a real-world example of Bitcoin’s independence, highlighting the redundancy of the current banking system:
To make an international wire transfer between, say, Canada and China, the money goes through four different banks (including two “correspondent” banks), two national payments systems, and an international settlement service (e.g., SWIFT). A standard international payment takes between 3 and 15 business days to complete, depending on the destination country, and involves multiple agents such as bank tellers, employees, and managers from the aforementioned financial institutions. Expensive bank fees and exchange rates apply.”
By contrast, Bitcoin is distributed in cyberspace across thousands of network nodes, and is inherently borderless. Payments are validated and updated by the network every 10 minutes. Intermediaries are not required (e.g. no correspondent banks are required). There are no bank fees for transactions, but users typically pay a small fee to payment validators (known as “miners”). Whereas for an international transfer of $5,000, a bank wiring would charge a fee of around $125, a fee of around $1 would be expected for a Bitcoin transfer.
Possible disadvantages of investing in Bitcoin
Functionality and adoption
Bitcoin is only accepted as a legitimate form of payment by a small number of online, global merchants. In most cases, you can’t pop down to the supermarket and buy your groceries with Bitcoin. Taking out a home loan and offering cryptocurrency as a deposit won’t fly.
The adoption of Bitcoin and other cryptocurrencies as valid currency may not ever come to fruition. Governments, financial institutions and other monetary authorities have already begun regulating digital assets, which, to some degree, defeats their original purpose.
Any investment carries potential risks. Bitcoin is no different. Its price fluctuations can be prolific and difficult to predict. Crypto is still in its infancy and there are likely to be many changes and developments that could negatively affect your investment.
Funds are either held in a hot wallet on digital exchanges – risking exposure to hackers, system crashes and other technical issues – or they can be stored on cold wallets in the form of an external hard drive, which may be lost, damaged or stolen.
Since there is no central authority governing Bitcoin, there can be no guarantee of its minimum valuation. If a large group of traders, or a small group with large holdings, decide to “dump” their coins, Bitcoin’s valuation is likely to significantly decrease. Therefore, the decentralised nature of cryptocurrencies can be seen as both a blessing and a curse.
What else is happening in crypto?
Intense volatility, reluctant real-world adoption and accessibility issues have emboldened consumer advocates to petition the Australian government to assess and identify ways to regulate cryptocurrency markets.
Not interested in cryptocurrency investment? How about the nouveau market for cryptoart?
Before you invest in cryptocurrencies, equities, or any other assets, it may be sensible to do your own research and seek advice from an expert to determine the best options for your financial situation and goals.
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