Should I Still Invest In Bitcoin? Is it Profitable?
Lots of people around the world are kicking themselves for not investing in Bitcoin sooner. There have been some serious losses, but all in all, the currency continues to gain traction.
That being said, the buy-in price is quite expensive (1 BTC is worth $6,195 USD at time of writing), and there’s never a guaranteed return on any investment. So how do we go about deciding if we should get in on this or not?
The easiest thing to do is to inform ourselves. How well do you really understand Bitcoin? What are its competitors? What does Bitcoin have in common with other currencies? How is it different?
Bitcoin has a wealth of qualities which make it suited to use as a currency, which has good implications for its viability as an investment. So what is it that makes Bitcoin suited to the world of currencies?
Bitcoin and Gold
Much like gold, Bitcoins are in limited supply. Bitcoins are limited to 21 million in total, and it becomes harder and harder to mine them as time goes on. Thus, the value of bitcoins increases as more and more are claimed by miners. It isn’t profitable anymore for new Bitcoin users to mine Bitcoins; the computational power required is simply too high.
Compare with gold; a limited supply, which becomes scarcer as it is mined, and which is prohibitive to smaller entities creating their own gold coins. And like gold, the value of Bitcoin tends to steadily increase.
This is also affected by a wide range of variables, like countries banning it’s usage or regulatory laws being passed which can affect its value as a currency.
Of course, like gold, its limited nature has its drawbacks. It makes it more and more difficult to buy in as time goes on, making it prohibitively expensive for a lot of new buyers. Another factor to take into account is that the investment doesn’t provide a steady income. Bitcoins must be traded in order for you to cash out, much like gold.
So, to review:
- Bitcoin mining is no longer profitable for new investors.
- Despite this, the limited nature of Bitcoin makes it viable.
- Bitcoin shares many qualities with gold, which make it suitable for use as a currency.
All of these things have good effects on the value of Bitcoin. Of course. there are other advantages to Bitcoin, and blockchain technology in general, that makes it an attractive investment compared to gold. Gold can be of varying purity, and typically needs to be verified or minted by some financial authority in order to be useful as a currency.
Bitcoin, on the other hand, is based on blockchain technology which allows for decentralized verification.
Bitcoin and Decentralization
If you’ve been studying up on blockchain (which you should be!), you probably know at least the basics of how the technology works. Transactions are associated with blocks of encrypted data which are verified through chains linked back through every transaction to the “genesis block”.
This means that redundant records of every transaction are kept on a distributed network of participating computers, and verification depends on many machines across the entire globe being able to match the encrypted blocks into their respective chains
This decentralized model allows for a variety of applications, not all of which have to do with currency. However, the prospect of a decentralized currency which can retain value independent of any financial authority or sovereign nation is an exciting one.
Another interesting tidbit to this factor is that Bitcoin transactions are typically tax-free! Some revenue agencies still treat them like property for tax purposes, however, which means you should stay informed on how this investment might affect your taxes.
Just like with any currency, reading any relevant news from around the world, as well as developments in the technology itself, forms the backbone of evaluating the investment. Decentralization is the main advantage that the technology espouses, and it’s developments will reflect this.
So, as you can see, there are a number of reasons why Bitcoin is considered a viable currency investment. That being said, it’s stability and usefulness still garner a significant amount of controversy.
Bitcoin has a habit of experiencing extreme gains over a short period, and slowly dropping to a stable level afterwards. Even though the price has been more-or-less steadily increasing, it still shows significant shakeups when events occur which can affect the currency.
One of the largest of these shakeups was when the SEC announced that it would require cryptocurrency exchanges to register with them in April of 2018. The value of bitcoin dropped sharply over a very short period, causing losses for many investors.
Occurrences like this demonstrate how extreme drops in value can happen suddenly, but that doesn’t mean that losses like this can’t be foreseen and mitigated. Keeping yourself informed on any decisions or banning that might affect the value of Bitcoin will allow you to react to changes in the market to make sure you don’t lose your whole investment.
So to get a more well-rounded idea of what you should expect, let’s take a specific look at some of the risks and disadvantages associated with Bitcoin:
- Scams. Because blockchain is a new technology, it’s easy for people to take advantage of those who don’t quite understand it. There are a variety of ways in which prospective bitcoin investors can be swindled, for example:
- Theft of private keys
- Fraudulent exchanges
- Risk of theft. The high value of Bitcoin makes it attractive for thieves, and many people don’t conduct the safety measures they should be:
- Vulnerable Bitcoin Wallets
- Malicious attacks on legitimate marketplaces
- Usage by criminals. For a long time, it was difficult for cryptocurrency to shake the stigma that it had developed as technology which enables criminal activity. While it is true that this reputation has been dispelled somewhat, it still lingers over the community like a kind of ominous shadow:
- Potential bans
- Guilt by association
- Potential for replacement. Bitcoin is the top crypto dog at the moment, but what happens if another currency vastly improves upon the technology? What if a sovereign nation with a booming economy decides to back another form of crypto?
- Technology is constantly being improved
- New coins are constantly being developed
- Environmental Concerns. Since mining Bitcoins has become such an extreme investment, specialized data centers dedicated to mining bitcoins have popped up, and these data centers use a lot of electricity. A lot of Bitcoin miners are also based in China, where laws affecting pollution and power supply are lax, and where most of the electricity comes from the burning of coal.
- Possible controversies
- Cost of mining in environmentally-conscious conditions
- Possibility of regulation by environmental authorities
- This is the big one. The question that stops you from finally buying in every time you think about doing it. Everybody is scared of losing their investment, and a high-risk item like Bitcoin simply seems like too much for many. That being said, this volatility is also what can make it quite profitable for short-term trading.
As you can see, the list of possible risks is fairly long. This makes Bitcoin a suspect investment for a lot of people who aren’t interested in playing a high-risk game. For others, however, the extreme point gains typical of cryptocurrencies are simply too attractive to pass up.
More and more companies and outlets are accepting Bitcoin as payment, nowadays, which is evidence that the stigma could be dissipating.
So, What’s Next?
Once you understand the different factors that affect Bitcoin’s value and usefulness as a currency, you will be able to make an educated decision as to whether or not it’s going to be a viable investment for your portfolio.
But, there are a lot of other factors which can affect Bitcoin outside of the ones mentioned thus far. Remember that Bitcoin is dependent on blockchain, a technology which has a very wide range of possible applications outside of cryptocurrency.
Depending on how the industry evolves, it’s quite possible that Bitcoin could end up solidified as a kind of global currency. The best part is that since becoming more widely accepted and understood, some big countries and institutions are starting to take notice.
The European Union and China have both espoused advocacy for a global currency, a possibility they say could be enabled by blockchain technology. This is quite exciting for the prospects of those invested in Bitcoin.
So what other exciting developments are going on in the world of Bitcoin?
- Heavy push by Asian and Middle Eastern countries. Large economic powers in Asia and the Middle east are showing large amount of interest in blockchain technology, and Bitcoin specifically. Dubai in particular has seen a lot of big name investors turning towards Bitcoin.
- Cybersecurity applications. Since theft and security are some of the main concerns affecting the viability of Bitcoin as a currency, the recent developments in cybersecurity software capabilities will drive the prices to increase over time as security gets better and better. Even though malicious attacks and theft will always be a risk, this risk will substantially diminish over time as it becomes more and more complex to steal Bitcoin, especially once more financial institutions and nations get behind the currency.
- Initial Coin Offerings. New coin developers typically offer some amount of whatever currency they have developed in exchange for an investment of Bitcoin or fiat currency. This is roughly equivalent to an Initial Property Offering of stocks for a new company. As new developers come up with new ways to improve upon crypto technology, it will become easier to buy into promising crypto ventures.
- Investment by financial institutions. The decentralized verification process used by blockchain has obvious applications for finance and insurance companies. Systems which they rely on now to process claims and complex investments would be significantly streamlined by blockchain. We’ll definitely see more and more of these industries turning towards blockchain technology as time goes forward.
- Emergence of private cryptocurrencies. Since the volatility of cryptocurrencies at the moment is subject to so many variables, it’s likely that we will see the adoption of private These would allow private corporations to conduct certain aspects of their business with the decentralized robustness of blockchain technology, without worrying about government regulations about currency exchanges. Private usage like this will obviously have deep implications for the usages of the technology, and the viability of core cryptocurrencies as well.
Obviously, just like any investment, your ability to judge its viability for you will be based entirely on the amount of information you afford yourself. There are many more areas that crypto is expected to expand in the future, and the more you research them, the better your idea will be of whether or not Bitcoin is right for you.
So now that we have some understanding of the things that make Bitcoin viable or not, as well as industries we can expect to see expanding in the future, Let’s take a look at how investment in Bitcoin actually works.
Investing in Bitcoin
Again, chances are you’ve already done some research on this. But, just in case, I’m going to go over some of the basics, and talk a bit about how they affect your investment options.
As I mentioned before, investing in crypto won’t get you a regular return. This is typical for currencies, as they need to be traded to be of any value. What this means for you is that you need to trade your bitcoins in order to make some money off of them.
In order to obtain and trade coins, you need to buy them on some sort of coin exchange, such as Bitstamp. These exchanges offer varying services and methods of payment, so it’s good to take a look at a list somewhere and decide which is right for you.
You will also need a Wallet with which to hold your Bitcoin. A wallet is a piece of software that safeguards your Bitcoins. Just like with exchanges, different wallets offer different capabilities, so it’s essential for you to educate yourself on which one is the best for you at the moment.
There are a few different investment strategies for Bitcoin, with varying levels of viability for a new investor:
- Short term trading. This is when you buy Bitcoin at a relatively low price, hoping that the price will rise. When it does, you sell for a profit. This minimizes the risk of loss compared to longer-term investments. This strategy can actually take full advantage of the price volatility, but it can easily fall victim to it as well.
- Long-term trading. This is when you invest with the intention of holding your investment until it appreciates a significant amount over time. This is easier to do with traditional investments that have less volatility, but it can still be viable for bitcoin depending on your buy-in price and how the currency develops. Most of the more popular cryptocurrencies, including Bitcoin, experience long-term upward trends despite enormous sudden dropoffs in value.
- Bitcoins are mined by users computing large amounts of data to solve the encryption keys used to track bitcoin transactions, in return for Bitcoins. This creates incentive for users to aid in the verification process by tying it into the creation process for new bitcoins. Of course, as bitcoins are mined, fewer are left remaining. This is what makes Bitcoin like gold. Although mining isn’t a viable strategy for new investors in most cases, due to the raw computing power required, it’s still a good idea to educate yourself on how it works, since this process directly affects the value of the coin. Other possibilities like crowdfunded mining could even help make this viable for new investors. Always do your own research.
These are just some basic investment concepts and specifics as they apply to Bitcoin. As more and more of this technology emerges, and interest in it develops, we will see these strategies expand to meet the capabilities of the currency. Even now, there are entire communities of financial professionals and amateur investors discussing various investment strategies for Bitcoin. If you do decide to buy after reading this article, educate yourself a bit on how different traditional investment strategies and tools will help you along the way.
There are a few concepts I’ve talked about here which are very pertinent to investment in Bitcoin, and there are many more terms and strategies out there relevant to the industry, so here’s a list of some things I didn’t get a chance to explain in greater detail.
- Blockchain technology. The underlying technology and philosophy which forms the backbone of Bitcoin. Although I’ve explained it a little bit here, it’s important to understand how the technology works as completely as possible. Remember that this is still relatively unexplored territory, and getting caught off guard by sudden developments can be really impactful for your investment.
- Types of theft and scams. The only way to avoid accidentally buying into a fake market and losing all your money, is to learn how to recognize fraud. In today’s digital world, the best defense against theft is understanding the different strategies thieves will use, and how to recognize ways in which they will manipulate you. Try looking up some horror stories about people investing in bad crypto, to get an idea of how important it is to stay vigilant.
- Although I described this with a decent amount of detail, it’s an extremely complex and well-documented area of expertise, and you can always learn more about it. Even though it may not be a viable option for you at the moment, understanding the technology will be invaluable to your investment strategy. This pursuit can also teach you a lot more about the tech behind cryptocurrencies, especially if you have a background in IT.
- Fiat Currencies. I mentioned this concept in passing a few moments ago. A fiat currency, to put it simply, is a currency which has no intrinsic value. The value of the currency is guaranteed because of government maintenance, or common agreement. While Bitcoin has some qualities of fiat currency, it is much closer to gold in its applications. It’s a good idea to read up on this concept and think about how the differences between fiat currency and crypto will influence the development of the industry.
And that’s about it
Bitcoin, and crypto technology in general, is an extremely complex topic that could justify thousands of articles about various investment strategies and economic philosophies. Luckily, the question we asked is simple: Is it still a good idea to invest?
In reality, this Is up to you. Your willingness to take risks, and the amount you’re comfortable investing will depend entirely upon your financial situation. For most new investors, the buy in for Bitcoin can seem steep, but when compared to some of the extreme gains they have experienced in the past, it has proven to be quite profitable for many of those involved.
Even the high volatility and infamous loss margins seem to have been little more than hiccups in the grand scheme of things, as the value of Bitcoin will continue to appreciate and stabilize as the technology matures.
Other cryptocurrencies have some exciting developments, and the possibility of Bitcoin being dethroned is always a reality, but investing in the top-dog can be considered a safe bet at the moment based on your investment strategy, and there are promising prospects coming from countries and institutions showing interest in Bitcoin.
All in all, while the price and risk can seem overwhelming, I think you’ll find that the more informed you are about this exciting new technology, the better idea you will have of how, when, and where to invest in crypto.Updated on: November 12, 2018