Seven years ago, the price of Bitcoin was $100. Today that price sits at $11,392. Someone in Jacksonville, Florida, made the first official purchase using bitcoins. He bought two pizzas with 10,000 Bitcoins.
Presently, that amount is worth a whopping $33.7 million. However, individuals are doing more than buying with bitcoin. The commodity has become an integral part of financial investments and a store of value.
As a significant investment vehicle, bitcoin seems to have divided modern investors into two camps. Those that support cryptocurrencies and those that don’t. Supporters who will go a long way in holding large quantities of bitcoins for dramatic periods. Hopeful of a massive surge in prices that would spike the value of their portfolios. Others within this fold of bitcoin proponents are short term traders who buy and sell bitcoin daily, taking advantage of intraday price rallies. The other camp comprises bitcoin non-supporters who neither own a digital wallet nor believe in the cryptocurrency narrative.
So should you invest in Bitcoin?
A study published on Bitcoinist by Yale economist Aleh Tsyvinski suggests Bitcoin should comprise at least 6% of an investment portfolio. The study goes ahead to indicate bitcoin skeptics should maintain at least a 4% bitcoin allocation. This is so that the portfolio attains optimal investment construction.
Tsynvisnki provides similar observations as another scholar at Arizona State University. Professor Dragan Boscovic noted institutional investors are recognizing the value of bitcoin as a new asset (valued investment opportunity). The investment asset will also seemingly encourage consumers and small shops to begin trading in cryptocurrencies. Both studies reinforce the idea that even staunch crypto opponents are allocating 1% of their assets to bitcoin for diversification purposes.
In this case, Diversification considers risk management principles, which maintain distinct types of investment types that limit exposure to any single risk or one set. The thinking behind investment diversification provides a portfolio that must be constructed from different kinds of assets—simply ensuring that the asset can yield higher but long term returns. However, significantly lowering the amount of risk in each investment holding.
However, I understand that each one of you reading this has your own bitcoin story. Maybe you are just getting started. You might have bought bitcoin a few years ago and sold it after it began realizing marginal success. Perhaps you just heard about it and are wondering whether it’s too late to get on board. The goal of this post is you understand how bitcoin works.
For instance, in recent times, bitcoin seems to be attracting the same lot of investors that support gold. An example is when the Federal Reserve and several other leading central banks bail out struggling economies, both gold and bitcoin attract investors. This is because governments rim down their fiat’s value by printing lots of money and dropping interest rates to approximately zero.
The Financial Bandwagon Effect
Remember, these fiat currencies are backed in full faith and credit by a nation or nations. Investors thereof respond to this by placing more money into currencies that are not controlled by central entities such as governments or central banks. Hence turning to crypto, metal, or oil. Notwithstanding, once interest rates hit lows and especially when central banks are adjusting inflation interest rates, investors seem to be less enamored with assets offering yields. These could be dividend-paying stocks or bonds.
The problem with this is the inducement of the bandwagon effect. Which makes new investors maintain a rising price of a haven asset. Which most probably buy at increasingly high costs. In case a new event or development takes place, the momentum breaks, and investors could bailout an asset. Resulting in high buying and selling low.
Crypto Have High Potential Returns
In his study, Tsynvinski demonstrates cryptocurrencies enjoy a high potential for returns in comparison to other asset types. This is despite the high volatility associated with these asset types. Tsyninski’s study, however, examined only Bitcoin, Ripple, and Ethereum. Hence may not necessarily reflect a comprehensive view of the coin economy.
Experts sometimes term bitcoin as the liberal coin. Investing in Bitcoin, therefore, reaffirms the belief in more radical alternatives to the existing financial system. This is given because bitcoin (crypto at large) is meant to disrupt a large financial system segment.
Your Idea of Money Depends on what you Choose to Invest in Gold or Bitcoin
Investing in either gold or bitcoin also reinforces the idea of how different people think about money. For example, gold retains its value from the historical and psychological attachment people have to it. Bitcoin, on the other hand, hopes to one day strip off the government their controls on the financial system; and remain the standard means of payment and exchange. Contrastingly, gold is more mature than bitcoin. Most people are, therefore likely to own it. Bitcoin, on the other hand, requires you to open a digital wallet, open an account with a digital exchange such as Coinbase, and exchange dollars for crypto. Closely, you find that investing in gold reinforces one’s belief in the international financial system, while bitcoin proposes more radical disruptions.
Remember, bitcoin has brought with it the advent of decentralized finance applications. Which are already replicating how traditional businesses operate, such as insurance, lending, and trading.
If you’re jumping into bitcoin investment as a beginner, start with a small bet, a small portion of your portfolio. Then learn through the curves, and you will gain sufficient evidence whether the asset will deliver consistent returns with time.