Is it Time to Invest In Bitcoin?
Google searches for “bitcoin” outnumber searches for “Beyonce’” these days. That’s because word is spreading that Bitcoin, the unregulated crypto-currency, has appreciated in value by more than 600% in the past year alone. So is investing in Bitcoin a good way to secure your financial future? Read on for my analysis…
Is Bitcoin a Good Investment?
I last wrote about Bitcoin almost exactly a year ago today, and the price for one Bitcoin then was USD $575. (See How to Spot a Cryptocurrency Scam.) One Bitcoin is now worth about $4,000! The chart below indicates Bitcoin’s uneven but meteoric rise since 2011.
If you took a modest gamble to purchase $1000 worth of Bitcoin in early 2011, when one Bitcoin was just one US dollar, you could cash out today with $4,314,900. That's far less than the estimated $350 million net worth of Beyonce, but you could retire comfortably on that sum. But still, is it a good investment today?
A big part of Bitcoin’s recent gains is increased demand. No longer is Bitcoin investment the high-stakes realm of Wall Street speculators. Middle-class people like truck drivers, flight attendants, and small business owners are getting a piece of the action. One of the major Bitcoin exchanges, called Coinbase, now has almost 10 million accounts. The supply of Bitcoins, on the other hand, is growing more slowly of late. One fundamental law of economics is that when demand outpaces supply, the price of a commodity (in dollars or whatever “real” currency) goes up.
What’s slowing growth in Bitcoin’s supply? Bitcoins are created by “mining,” which involves a set of very complex calculations that authenticate the blockchain, or running record of all Bitcoin transactions. Miners are rewarded for their investment of CPU cycles and electricity with new Bitcoins literally minted out of thin air. The more transactions in the blockchain, the more work and electricity it takes to create a Bitcoin. That’s what’s slowing the growth of supply.
The growth of the blockchain is also slowing the authentication of Bitcoin transactions; that, after all, is the definition of “mining.” So if you try to send Bitcoin to a friend who’s stranded in Patagonia, it may take several hours to show up in his digital Bitcoin wallet. That’s a problem not only for stranded friends, but for e-commerce as well.
The shadowy group of geeks who set the rules of Bitcoin have disagreed on how to fix the problem of transaction delays. As a result, splinter groups have formed with their own rules and crypto-currencies with names like “Bitcoin Cash.” Which group’s rules will prevail is anyone’s guess, but it is assured that the problem of slow transactions and Bitcoin creation will be solved, at least temporarily.
Predicting the Future is Hard
When the supply of Bitcoins catches up to demand, the price of a Bitcoin will fall. It tends to rise and fall precipitously; take a look at the chart above. For now, those who bought Bitcoins five or six years ago have seen so much appreciation that the current downward trend doesn’t worry them. But if you’d put serious money into Bitcoin at its peak a few days ago, you’d be singing the blues now.
Knowing that Bitcoins are likely to become more plentiful and cheaper, to me it makes less sense to invest in Bitcoin now. If you expect another exponential surge in demand that will push the price up again, you should get into the Bitcoin game. But how would you know?
Bitcoin’s success has spawned over 1,000 copycat crypto-currencies, and an equal number of ways to grow the user bases of those currencies. Some of them are scams. I was approached about joining a crypto-currency marketing scheme that turned out to be a Ponzi scheme. It was so crooked that its founder is forbidden to market her product in her home country. I passed.
Most crypto-currencies are going to fail, taking investors’ money with them. I’m not going to recommend any crypto-currency by name, because I’m not licensed to give investment advice. The SEC is looking very hard at crypto-currencies right now, and could crack down on them at any time. Crypto-currency is a speculative investment vehicle, and may be regulated as such.
I'm not saying that Bitcoin is a scam. It's not. But it's most certainly a speculative investment, and there's no guarantee that it will continue to rise in value. Professional financial advisors say one should have no more than five percent of one’s assets at risk in speculation at any time. That sounds like pretty good advice to me. Have you invested in Bitcoin? Your thoughts on this topic are welcome. Post your comment or question below...
This article was posted by Bob Rankin on 28 Aug 2017
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Article information: AskBobRankin -- Is it Time to Invest In Bitcoin? (Posted: 28 Aug 2017)
Copyright © 2005 - Bob Rankin - All Rights Reserved