Bitcoin (BTC) has been one of the best investments in the world since it was first created back in 2009. Unfortunately, 2022 has been a bloodbath for Bitcoin investors. “Crypto winter” has sent BTC prices tumbling about 60% year to date as of Sept. 21, and investors must now decide whether to buy the dip or run for the hills.
Here are some things every investor needs to know about Bitcoin:
— The Bitcoin bull thesis.
— Crypto winter.
— Risks of owning Bitcoin.
— How to invest in Bitcoin.
— The future of Bitcoin.
The Bitcoin Bull Thesis
Bitcoin investors may have been rattled in 2022, but there are plenty of reasons to be bullish. First off, Bitcoin remains the world’s most popular and most valuable cryptocurrency, with a market cap of more than $360 billion. Second, Bitcoin’s long-term track record speaks for itself. Bitcoin first crossed the $1 threshold back in April 2011. In a little more than a decade, the price of the cryptocurrency skyrocketed to as high as $68,789 in November 2021 before pulling back to around $19,000 this September.
Bitcoin has a relatively loose correlation with other asset classes, making it a potentially attractive tool for portfolio diversification. It has a fixed supply, meaning investors will not be negatively impacted by dilution. Its fixed supply may also eventually make it an attractive hedge against inflation and a store of value, although its extreme volatility has limited its appeal in those departments up to this point.
If Bitcoin ultimately becomes the world’s universal digital currency, its demand will grow exponentially and so will its price. Bitcoin’s decentralized nature also helps secure the network and make it resistant to manipulation, tampering and fraud. Bitcoin can serve as a way for people around the world living in underbanked regions or countries with unstable financial systems to protect their wealth and gain access to critical financial services.
Unfortunately for Bitcoin investors, extremely high inflation prompted the U.S. Federal Reserve to begin aggressively raising interest rates in 2022, sending risk asset prices tumbling. While Bitcoin bulls have touted the crypto as an inflation hedge, Bitcoin has actually had a positive correlation to stock prices in 2022.
Falling crypto prices exposed overleveraged crypto lending companies and hedge funds, leading to several high-profile bankruptcies and the $60 billion collapse of LUNA and its associated stablecoin Terra USD (UST). Even the world’s largest stablecoin, Tether (USDT), briefly lost its peg to the U.S. dollar during the worst of the crypto winter volatility.
Sukanta Sekhar Das, CEO and co-founder of CoinMarketBag, says inflation is the main culprit behind Bitcoin’s 2022 weakness.
“Inflation is certainly killing the markets — and with BTC being more closely correlated with stocks than perhaps true believers feel comfortable with, it’s hard to separate the overall macroeconomic performance from that of Bitcoin’s,” Sekhar Das says.
“If we can get inflation under control, then I believe BTC will enter a bull market going through most of 2023,” he says.
Risks of Owning Bitcoin
It may seem like a long time since Bitcoin’s first transaction roughly 13 years ago, but cryptocurrencies don’t have the long-term track records of other popular asset classes, such as stocks and bonds. As 2022 demonstrates, Bitcoin is also prone to periods of extreme volatility, such as its roughly 80% crash in late 2017 and 2018.
In addition, it’s difficult for even financial analysts to determine a true value for Bitcoin because it does not generate cash flow or revenue, nor does it represent ownership of physical assets or intellectual property. Instead, its price is tied exclusively to investor sentiment, which can be unpredictable and inconsistent.
Bitcoin also poses a significant risk to the environment. Bitcoin mining produces about 40 billion tons of carbon dioxide annually, a huge red flag for any investors concerned about environmental, social and governance, or ESG, principles.
At this point, the cryptocurrency market is very loosely regulated. Up to this point, the U.S. Securities and Exchange Commission has repeatedly rejected potential Bitcoin spot exchange-traded funds, or ETFs, over concerns about investor safety.
Bitcoin may ultimately pose a serious threat to fiat currencies and the traditional financial system. The more popular Bitcoin becomes, the more regulators may crack down on investors. More regulation could make Bitcoin less appealing to some investors but more appealing to others.
Marcus Sotiriou, analyst at publicly listed digital asset broker GlobalBlock, says regulatory clarity could open the door for more institutional Bitcoin investment.
“Government intervention in the crypto market is a key talking point at the moment among investors, as we are still yet to have the clarity that we need for the crypto industry to thrive,” Sotiriou says.
How to Invest in Bitcoin
There are a number of different ways for investors to gain exposure to Bitcoin. Investors can buy the cryptocurrency directly in their accounts on platforms like Robinhood Markets Inc. (ticker: HOOD), Coinbase Global Inc. (COIN), PayPal Holdings Inc. (PYPL) and Cash App.
Investors can also buy shares of Bitcoin futures ETFs or trusts. Popular Bitcoin futures ETFs trade on major U.S. exchanges just like stocks. These ETFs include the ProShares Bitcoin Strategy ETF (BITO), the VanEck Bitcoin Strategy ETF (XBTF) and the Valkyrie Bitcoin Strategy ETF (BTF). The Grayscale Bitcoin Trust (GBTC) is a $12.9 billion trust structured similarly to an ETF that owns Bitcoin and trades in the U.S. on the over-the-counter market.
Finally, investors can buy shares of companies that mine Bitcoin, hold it on their balance sheets or benefit from its rising price. These stocks include companies like Coinbase, Block Inc. (SQ) and MicroStrategy Inc. (MSTR).
The Future of Bitcoin
Even after the beating that Bitcoin prices have taken in 2022, the world’s most popular cryptocurrency is still up 81% over the past three years and 411% over the past five years as of Sept. 21. Bitcoin’s 60% sell-off this year may seem extreme, but the volatility Bitcoin prices have experienced this year is actually fairly typical. In fact, Bitcoin hasn’t completed a single calendar year without an annual gain or loss of at least 60% since 2015.
BTC’s volatility may be frustrating to investors, but it stems from the combination of Bitcoin’s massive potential and its entirely uncertain outlook.
Justin Daniels, co-chair of the Baker Donelson Blockchain and Digital Assets Technology Practice, says the entire cryptocurrency and blockchain space is still in its infancy.
“I believe we are going through a period of time similar to when we talked about how the internet might be useful and then we went through the dot-com bubble that burst,” Daniels says.
The stock market eventually recovered from the bursting of the dot-com bubble, and Daniels says Bitcoin prices will likewise eventually recover from the crypto winter as well.
“Long term, Bitcoin will rebound because we are moving to a cashless society. Regardless of its faults, Bitcoin is a much better alternative monetary system for people around the world who are either unbanked or whose government tightly controls the currency,” he says.
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Update 09/22/22: This story was published at an earlier date and has been updated with new information.