There’s a lot of buzz about Bitcoin these days.
In late October, the price per bitcoin reached a new 52-week high on the news that digital payments giant PayPal Holdings (ticker: PYPL) would allow customers to trade bitcoins and other cryptocurrencies.
According to Ian Balina, founder of cryptocurrency intelligence company Token Metrics, Bitcoin is the greatest investment opportunity of our generation. Other major businesses such as Microsoft Corp. ( MSFT), Overstock.com ( OSTK), AT&T ( T) accept bitcoin as payment, demonstrating a sign of broader adoption.
If Bitcoin is indeed here to stay, investors should know if it’s worth jumping on the bandwagon now. Below you’ll find the history, supply and demand, and other factors that influence current and future bitcoin price movements:
— The history of Bitcoin.
— Bitcoin versus other assets.
— Understanding the cryptocurrency market.
— Reasons to consider buying.
— The bottom line: Investing in Bitcoin.
The History of Bitcoin
Bitcoin began on a computer in 2008 during the last financial crisis.
Satoshi Nakamoto, a pseudonym, is regarded as the founder of Bitcoin. It was developed as a decentralized, digital currency free from governmental oversight. The cryptocurrency is stored on a computer and sent between users across a network without the need for an institution or government intermediary.
During its first year, miners or computers involved in cryptocurrency creation traded bitcoins for fun. The first bitcoin payment occurred in Florida on May 22, 2010, when a man bought two Papa John’s pizzas worth $25 for 10,000 bitcoins. At that point, four bitcoins equaled one penny.
As of November 3, 2020, one bitcoin is worth around $13,688.70 — which means the bitcoins used to buy those two pizzas would now be worth nearly $137 million.
Since then, many types of cryptocurrencies have been created, all with varying degrees of success. This expanded the code behind Bitcoin’s blockchain — a digital ledger for recording transactions — and enabled other uses for the technology.
Bitcoin’s price has exploded during the past six years from $333.60 on November 3, 2014 to a peak value of around $19,140.80 on December 17, 2017.
Of course, the cryptocurrency has fallen far from its peak to where it is today. This price volatility, along with increasing competition and limited adoption, raises the question of whether Bitcoin is worth investing in.
Bitcoin vs. Other Assets
There is an abundance of positive sentiment around Bitcoin right now.
Some investors compare Bitcoin to gold as a potential store of value as it increases in relative worth against both the U.S. dollar and gold.
“Unlike fiat currencies, Bitcoin cannot be hyperinflated. Its blockchain is coded so that there will never be more than 21 million bitcoins in existence, and there are approximately 2.8 million left to mine,” says Steve Ehrlich, CEO and co-founder at Voyager Digital in Stamford, Connecticut. The price of this crypto asset should rise as demand outstrips supply, and total supply is capped.
The allure of investing in Bitcoin is underscored by well-known firms buying and accepting digital assets. At the beginning of October, Square ( SQ) bought 4,709 bitcoins for $50 million, or $10,617.97 per coin, while PayPal announced its intention to integrate the cryptocurrency into its platform in 2021 later that month.
Understanding the Cryptocurrency Market
Just because bigger players are joining the Bitcoin party doesn’t mean that ordinary investors should buy in. Knowing the risks of any investment is as important as grasping potential gains.
Ulrik Lykke, executive director at cryptocurrency hedge fund ARK36, echoes a well-known mantra: “Invest in assets that you understand.” Before investing, Lykke recommends performing your due diligence and understanding how Bitcoin works. The internet is replete with cryptocurrency educational resources.
Lykke says that Bitcoin offers an excellent reward-to-risk profile. One way to see this is by looking at the Sharpe ratio — a common risk metric used to help investors understand the return of an investment in relation to its risk. The ratio is the average return earned in excess of the risk-free rate or government Treasury bill return per unit of volatility or total risk.
Woodbull.com analyzed the Sharpe ratio of Bitcoin in contrast with other assets to calculate its reward-to-risk profile. The data found that when adjusting for risk, the potential Bitcoin returns are higher than those of other assets such as gold, U.S. stocks, bonds, real estate and oil.
Reasons Why Bitcoin Is Worth Investing In
There are many reasons to invest in Bitcoin after understanding the market and risks.
Anthony Denier, CEO of Webull Financial, considers digital assets like bitcoins to be useful for portfolio diversification. Specifically, less correlated assets are known to help overall investment returns.
In the case of Bitcoin, Denier joins the ranks of those who consider this crypto asset to be a hedge against inflation and geopolitical uncertainty. He calls it “this generation’s liquid gold.” As Bitcoin becomes more widely accepted as a method of payment, it gains acceptance as a legitimate asset class.
High-net-worth investors are dipping their toes into cryptocurrency investing, says Sathvik Vishwanath, CEO at Unocoin, an open-source, decentralized digital currency and payment network. With low interest rates and global macroeconomic uncertainty along weighed against cryptocurrency outperformance, the wealthy are becoming more comfortable with the asset.
Brian Estes, chief investment officer at Off the Chain Capital, adds another reason to buy Bitcoin now. Estes claims that the best time to own this crypto asset is in the 12 to 18 months after a bitcoin halving — when the pace of bitcoin creation is cut in half. Since the most recent halving was in May 2020, he believes that now is a good time to invest.
Bottom Line: Bitcoin Investing
Bitcoin evangelists are on board with the cryptocurrency’s benefits, but like any investment, there are also risks.
Bitcoin might have a rosy future, but imagine if you had purchased it on December 17, 2017 for $19,140.80 per bitcoin. Your investment would have lost money during the subsequent three years. At the recent price of $13,688.70 per coin, your three-year investment declined by 28.48%.
When investing, it’s wise to buy low and sell high — but Bitcoin is difficult to value. It’s volatile and lacks the dividend payments of many stocks and bonds. Actually, supply and demand may be among the major factors in its valuation.
If you think Bitcoin is a good investment for you, consider its risk-to-reward profile and do your homework before investing.
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