While most people have at the very least heard of Bitcoin, very few truly understand how this innovative and exciting asset class works. But, the numbers speak for themselves.
That is to say – had you invested in Bitcoin back in 2009 – you would have paid just a small fraction of a cent, penny, yen, or whatever your local currency may be. Fast forward to the turn of 2021 and Bitcoin is approaching the $40,000 region.
So that begs the question – is Bitcoin a good investment or simply a fad that is destined to fail?
In this article, that’s exactly what I intend on finding out.
Note: By the time you get around to reading this article – Bitcoin could be worth significantly more or less than the $40,000 it is currently priced at.
What is Bitcoin?
It doesn’t matter which asset class you are considering investing in – whether that’s stocks, ETFs, mutual funds, or Bitcoin – it’s crucial to have an understanding of what you are putting your money into. After all, if you want to make financial gains in the investment space, you have to take an element of risk.
So, before investing in Bitcoin – there are some basic fundamentals that you need to understand.
First and foremost – Bitcoin was launched in 2009 by an anonymous developer called “Satoshi Nakamoto”. Even to this day, nobody knows the true identity of Nakamoto. Nevertheless, Bitcoin is a cryptocurrency – meaning that it does not exist in physical form.
Instead, cryptocurrencies are digital currencies that are backed by “blockchain” technology. The blockchain – at least in the case of Bitcoin, is not owned or controlled by any single person. It isn’t backed by a government or central bank, either.
On the contrary, Bitcoin transactions are controlled by “miners”. Anyone can be a miner by connecting a piece of specialist hardware to a computer device.
The most pertinent metrics about Bitcoin are as follows:
- You can send, receive, and store Bitcoin digitally. Transactions take 10 minutes to process and fees usually cost in the region of $1.
- Bitcoin transactions are pseudonymous. This means that the transaction is not tied to the identity of the sender or receiver.
- Although the network is pseudonymous, all Bitcoin transactions are publically viewable on the blockchain.
- Every 10 minutes, 6.25 new Bitcoins enter into circulation. This will be capped to 21 million coins in 2140, meaning that Bitcoin is a finite asset.
Now, as innovative as the above characteristics are, I should make it clear that the vast majority of people that buy Bitcoin do so on a speculative basis. That is to say, most people buy Bitcoin because they want to make money.
How do you make money from a Bitcoin investment?
Before asking yourself is Bitcoin a good investment, you need to understand how the process actually works. The good news is that if you have a bit of experience in the stock markets – then you’ll be pleased to know that the fundamentals of investing in Bitcoin are virtually identical.
This is because, like a stock, the price of Bitcoin goes up and down throughout the day. This is driven by the effects of demand and supply. For example, as more and more people buy Bitcoin, this will naturally see its price increase.
At the other end of the spectrum, when there are more sellers than buyers, the price of Bitcoin will go down. As such, the primary objective when investing in Bitcoin is to sell your coins for more than you originally paid.
Here’s a basic example to help clear the mist:
- Let’s suppose that you invested $500 into Bitcoin on July 19th, 2017
- On this date, the price of Bitcoin was $2,344
- Let’s then suppose that you kept hold of your Bitcoin until January 2nd, 2020
- On this date, the price of Bitcoin was $29,376
- This means that Bitcoin has increased in value by 1,153% since you invested
- As such, you sell your Bitcoin and withdraw the proceeds back to your bank account
Now, as per the above example, a 1,153% profit on an initial investment of $500 means that you would have walked away with $6,265. In this scenario, the answer to is Bitcoin a good investment is a resounding yes.
However, there are also scenarios where you might have lost a lot of money investing in Bitcoin. For example, had you entered the market towards the end of 2017, you would have paid just under $20,000 for a single Bitcoin.
Just 12 months later, the very same Bitcoin was worth just $3,500-ish. This means that the value of your Bitcoin investment would have declined by 80% – should you have decided to cash out.
Is Bitcoin a good investment? The good points
So now that I have explained the basics, it’s now time to find out is Bitcoin a good investment or simply a fad.
For this, I’ll start with some of the reasons why you might consider investing in Bitcoin.
1: Bitcoin is the best performing asset over the last 10 years
There is no getting away from the fact that those investing in Bitcoin when the digital currency was still in its infancy are now likely to be multi-millionaires. After all, Bitcoin was worth just a fraction of a cent for several years.
As I discussed towards the start of this Is Bitcoin a Good Investment article, the digital coin breached $40,000 in January 2021. This means that at the time of writing, it is in all-time territory.
In other words, anyone that invested in Bitcoin prior to me writing this article is now in profit – as the cryptocurrency has never been worth more.
In more recent times, Bitcoin hit 52-week lows of around $5,000 in March 2020. This means that in just 9 months of trading, the digital currency increased by over 700%.
During the same period, the S&P 500 Index increased by 67%. Sure, these are huge returns nonetheless, but significantly lower than that of Bitcoin.
2: Bitcoin is similar to gold
Bitcoin could one day be used as a medium of exchange, not least because the system allows you to send and receive funds quickly, cheaply, and burden-free. However, it also carries a lot of similarities to gold – meaning that Bitcoin is potentially a store of value.
This is because much like gold, the supply of Bitcoin is finite. As I mentioned earlier, the total number of Bitcoins that will ever exist is 21 million.
In the case of gold, there is only so much of the precious metal in existence before we mine it dry. In turn, both Bitcoin and gold should, in theory, continue to appreciate in value indefinitely.
But, unlike gold, Bitcoin is a digital asset – meaning that it is simple and affordable to store. In fact, Bitcoin is stored in a digital cryptocurrency wallet that can be obtained online, via your desktop or mobile device, and even in the form of hardware.
Additionally, Bitcoin can be fractionated with ease. Sure, gold can be broken down into smaller units, but this is both costly and cumbersome. With Bitcoin, the digital currency can be fractionated down to 8 decimal points at the click of a button.
3: The supply of Bitcoin cannot be manipulated
In the first 10 months of 2020 alone, the US Federal Reserve created more than $3.3 trillion dollars out of thin air. The most uncanny thing about this figure is that this equated to 18% of the entire supply of US dollars in circulation.
The Federal Reserve isn’t the only central bank to have an appetite for quantitive easing. On the contrary, the process of printing money out of thin air is something initiated by most governments around the world.
In turn, this means that each and every day, the value of the currency you have stored in your bank account continues to depreciate.
This is in stark contrast to Bitcoin – as the network is not owned or controlled by any person, authority, government, or central bank. As a result, the supply of Bitcoin cannot be manipulated. I mentioned earlier that every 10 minutes, 6.25 newly created Bitcoin enter circulation.
This used to be 50 Bitcoin, before being reduced to 25, 12.5, and now 6.25. This is a systematic process known as ‘halving’, which occurs roughly every four years. That is to say, this will happen until approximately 2140 when the total supply of 21 million Bitcoin is reached.
4: Bitcoin has defined the ‘bubble’ theory
When trying to assess is Bitcoin a good investment, you might have come across commentators that refer to the digital currency as a “bubble”.
In fact, some of the most famous people to have called Bitcoin a bubble in one way, shape, or form include:
- Warren Buffet
- Mark Cuban
- Ben Bernake
- Bill Gates
- Jamie Dimon
Crucially, most of the comments made by famous opponents of Bitcoin was made after the digital currency crashed from its prior 2017 highs of $20,000. After all, Bitcoin has since dropped to lows of sub-$4,000.
But, as we now know, not only has Bitcoin recovered all of its post-2017 losses, but it entered 2021 at just below $30,000. Since then, the digital currency has surpassed $40,000 – double its prior all-time high.
5: Bitcoin futures are traded by institutional investors
Much like stocks, gold, oil, wheat, and heaps of other asset classes, there is now a fully-regulated Bitcoin futures trading market in existence. In fact, this has been the case since late 2017.
If anything, this illustrates that Bitcoin is taken seriously by some of the most important players in the financial sphere. After all, the Bitcoin futures scene is heavily regulated much like any other trading sector.
In the very near future, it is all-but-certain that a Bitcoin ETF will eventually get the green light from the US Securities and Exchange Commission. When it does, this will once and for all open up the doors for institutional investors. This can only be a good thing for those of you considering an investment in Bitcoin.
6: Bitcoin is worth a fraction of its true potential
Make no mistake about – as an asset, Bitcoin is still worth just a fraction of its true potential. Sure, at the time of writing in early 2021, the digital currency carries a market capitalization of just over $750 billion.
If you’re a complete investing novice, this figure might not mean much to you. But, to put this into perspective, there are currently just 6 US stocks that are worth more than this.
In other words, at the time of writing, Bitcoin is worth more than companies like Berkshire Hathaway, Visa, Johnson and Johnson, JP Morgan, Proctor and Gamble, MasterCard, Disney, Nike, Ford Motors, and Bank of America.
But, Bitcoin isn’t a single company operating in a single sector or industry. On the contrary, it is potentially a global medium of exchange like the US dollar and/or a store of value like gold.
On the one hand, I am not saying that Bitcoin is going to replace gold as the de-facto store of value. However, gold does have a market capitalization of around $10 trillion – which is roughly 20 times more than that of Bitcoin right now. In other words, the upside potential for Bitcoin is still highly significant.
7: You don’t need to break the bank to invest in Bitcoin
Many people are unaware that you can invest small amounts into Bitcoin, as opposed to buying a full coin. After all, you likely won’t want to risk tens of thousands of dollars into a speculative asset that is still unproven over the course of time.
As I mentioned earlier, Bitcoin can be fractionated by 8 decimals. This means that a lot of online brokers allow you to invest just a few dollars. For example, let’s suppose that you invested $30 into Bitcoin when it was worth $30,000.
This means that you would own 1/1000th of a single Bitcoin. Therefore, if the value of Bitcoin increased by 50%, your $30 investment would be worth $45.
Being able to invest in Bitcoin with small amounts is also good for dollar-cost averaging purposes. For example, by investing $50 at the end of each month, you would get a different cost price on each purchase. In turn, you would be able to “average-out” shorter-term price fluctuations.
Is Bitcoin a good investment? The bad points
When focusing purely on the above plus-points, the answer to “Is Bitcoin a good investment” is quite clearly a yes. However, it is absolutely crucial that you also consider the risks of investing in Bitcoin before taking the financial plunge.
The main risks that I have identified are as follows:
1. Bitcoin is extremely volatile
All financial instruments go up and down in value throughout the trading day. However, I should make it clear that Bitcoin can be extremely volatile. For example, Bitcoin will often increase or decrease by over 10% in a single day.
But, the volatile nature of Bitcoin can be a lot more devastating than this. As I covered earlier, those investing in Bitcoin in late 2017 when it was worth $20,000 were looking at financial losses of 80% just 12 months later.
In more recent times, Bitcoin was worth over $10,000 in February 2020. Just one month later it was worth around $5,000 – representing a decline of 50%. Crucially, if higher-than-normal volatility makes you feel comfortable, an investment in Bitcoin might not be good for you.
2. Bitcoin-related hacks, scams, and fraud are still a problem
Due to a lack of understanding of the technology itself, a lot of people will tell you that Bitcoin is a scam. But, as I always say, for something to be a scam – somebody has to benefit financially. And don’t forget – Bitcoin is not owned or controlled by any single person or authority.
As such, the network is far from a scam. With that being said, Bitcoin-related crimes are still a huge problem for the reputation of the digital currency. At the forefront of this is that billions of dollars worth of cryptocurrency have been stolen from third-party exchanges over the past few years.
This has either been a result of an external attack or internal fraud. You then have issues such as malware attacks – where the criminal’s currency of choice is typically Bitcoin. There are also one too many online get-rich-quick scams that center on Bitcoin.
Ultimately, as Bitcoin transactions are not tied to the identity of the sender or receiver, this makes it popular with those looking to commit financial crime.
In its defense, it is estimated that less than 1% of all Bitcoin transactions are linked to illicit usage. In contrast, the International Monetary Fund has previously estimated that the amount of “fiat” money laundered annually is between 3-5% of global GBP.
3. Bitcoin is a non-income yielding asset class
When you invest in stocks, there is a good chance that you will receive a quarterly dividend. When you invest in real estate, you’ll likely get monthly rental income.
However, when you invest in a cryptocurrency like Bitcoin, you won’t be entitled to regular income of any form.
Much like gold, the only way that you can grow your money is when Bitcoin rises in value. While this isn’t overly problematic, it does limit your ability to benefit from compound interest.
4. Bitcoin is not regulated
When considering is Bitcoin a good investment, you need to factor in the lack of regulation. After all, Bitcoin is not owned or controlled by any nation-state or central bank.
This means that the network itself cannot be regulated in its truest form. In turn, this means that you effectively have nowhere to turn in the event you have your Bitcoin stolen.
It’s not like you can ring your bank to tell them you have had your wallet used by an authorized actor. As such, you need to be extremely careful that you keep your Bitcoin stored safely.
5. Governments do have the authority to “clamp down” on Bitcoin
Although in the section above I noted that Bitcoin can’t be regulated as it isn’t controlled by a single government or central bank, this isn’t 100% correct per-say.
By this, I mean that governments can install specific legislation that prohibits its citizens from using Bitcoin.
For example, the easiest way of doing this is to ban online brokers and exchanges from accepting debit/credit cards or bank account payments. In turn, this would make it very difficult for the ‘average Joe’ to invest in Bitcoin.
Governments can also put pressure on banks operating within their borders to prevent Bitcoin-related transactions.
Sure, this can’t technically stop people from sending and receiving digital currencies wallet-to-wallet, but such a draconian governmental attitude to Bitcoin could have a disastrous impact on its future value.
How do you invest in Bitcoin?
In a time not so long ago, investing in Bitcoin was a cumbersome process. You would need to transfer funds from your bank account into the account of a shady, unregulated exchange.
Although the vast majority of cryptocurrency platforms still operate without a license, there are a number of brokers in the online space that are regulated.
For example, eToro is an online broker that offers everything from Bitcoin and stocks to ETFs and CFDs. The broker is regulated by the FCA, ASIC, and CySEC and is also registered with FINRA.
You can deposit funds instantly with a debit/credit card or an e-wallet like Paypal. Then, it’s just a case of entering the amount that you want to invest in Bitcoin. Crucially, the minimum Bitcoin investment is just $25, which means that you don’t need to risk large amounts.
There are several other options in the market. Just make sure that the platform is regulated and that it offers competitive trading fees.
When I first started writing this “Is Bitcoin a Good Investment?” article, the digital currency was worth $30,000. As I write this conclusion, Bitcoin has since surpassed $40,000. This means a further increase of 33% in a matter of days.
However, what goes up will often come straight back down – especially in the case of Bitcoin. As such, you must be aware that while the potential returns on this asset class are huge, as are the risks. That is to say, there is no guarantee that you will make a financial return by investing in Bitcoin.
At the same time, Bitcoin is one of those assets that we might look back at in 10 years’ time and say “I wish I had invested when it was worth $40,000”.
Ultimately, if you are going to invest in Bitcoin – just make sure that you keep your stakes sensible. Most importantly, make sure that your portfolio is well-diversified with other assets like high-grade stocks and bonds.
Is Bitcoin a good investment right now?
Bitcoin has arguably proven that it is not a bubble. After all, the digital currency has since surpassed a value of $40,000 - which is double the prior all-time high of $20,000 it hit in late 2017.
Can you lose money on Bitcoin?
Yes, you can lose money by investing in Bitcoin. This is no different from investing in stocks or bonds
Has anyone got rich from Bitcoin?
Those who bought Bitcoin back in 2009 would paid less than 1 cent for each coin. Had they held on for several years, they would have made a significant amount of money.
Is Bitcoin legal?
Yes, you can buy, sell, trade, send, and receive Bitcoin legally in most countries.
What is the minimum Bitcoin investment?
Bitcoin can be fractionated by 8 decimals. As such, you can invest really small amounts. However, your chosen broker or exchange might have a minimum investment policy in place, so be sure to check this before signing up.