Over the last couple of years, it hasn’t been hard to find headlines predicting the death of cryptocurrencies. Not only did Bitcoin’s price drop to around $15,500 (from a high of over $60,000), but governments around the world have looked at increasing regulations on all cryptocurrencies after the failures of FTX and BlockFi. Recently Bitcoin has recovered to over $30,000 (July 2023), a return of more than 90% from its earlier lows. Is it time to jump back into the market?
Growth potential
During the past decade, Bitcoin proved to be extremely profitable for early adopters, with its value surging from just a few cents to its current price of thousands of dollars. This exponential growth has attracted both individual investors and institutions, further bolstering Bitcoin’s popularity. Consequently, those who believe in Bitcoin’s long-term potential are considering purchasing it now to capitalize on its future growth.
Highly volatile
However, the return for Bitcoin has definitely not been a straight shot up. From the fourth quarter of 2020 until recently, Bitcoin has grown from $10,000 to more than $60,000 in March 2021, then back down to $15,500 over the last year. The cryptocurrency market is highly volatile, leading to significant price fluctuations within short time frames. This unpredictability can make it a nerve-wracking investment, especially for individuals who are risk-averse.
Limited supply
Unlike the US Mint, there’s a limit to the amount of Bitcoin that can be mined. What this means is the production cap could cause an increase in the value of each Bitcoin as we approach the stated limit of 21.5M Bitcoin.
Security and regulation
While not difficult, purchasing Bitcoin can be a headache if you’re using a wallet. Not only do you have another account to manage, you are solely responsible for securing the key that allows you to access your money. Check the internet for stories on people who have lost their keys; there’s no central repository where you can give personal information and retrieve your key.
Additionally, while blockchain was created to be largely impervious to hacking, criminals have discovered vulnerabilities in the system. MIT noted that hackers have stolen more than $2B of cryptocurrency since 2017.
While most people believe increased regulation is on the way, it’s not here yet. And the effect it will have on the marketplace is unknown. Some believe that regulation will provide a backstop, making people more willing to trade cryptocurrency. Others worry that having someone watching the system will destroy the decentralization that made it popular in the first place.
Is Bitcoin right for me?
When you’re deciding on an investment, you have to consider your ability to accept risk and your time horizon. Bitcoin can be a highly lucrative investment but requires a long-term perspective and the ability to withstand significant fluctuations in its value. If you are looking for a quick return or have a low tolerance for financial risks, Bitcoin may not be the best option.
Other options
As someone who has researched blockchain technology and cryptocurrencies, the potential of both has intrigued me. I will never use Bitcoin to purchase consumer goods or buy a car, but I wanted to diversify my portfolio into this space and found exchange traded funds that would achieve my goal. You may choose to do likewise. Research both blockchain funds and specific cryptocurrency funds if purchasing one cryptocurrency directly seems daunting. But know it’s going to be a bumpy ride. Short term, Bitcoin is up 90%, yet long term it’s still down more than 50%. Even if you decide on a broader blockchain fund, movements in the top cryptocurrency value will have outsized effects on your returns.
Photo by Kanchanara