Is it Time to Invest In Bitcoin?

Category: Finance

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.

Bitcoin price history

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...

 
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Most recent comments on "Is it Time to Invest In Bitcoin?"

Posted by:

John
28 Aug 2017

Bob...

Bit coin is limited to only 21 million coins and the last will be mined in the 2040's. There are 16 million in existence now. I doubt supply will ever catch up to demand and hence the rise in the value of bitcoins . It is very popular in China and Japan has alreay recognized it has a legal currency.

During the latest dip in the stockmarket gold hardly rose and it is usually the safe haven of choice when things go bad. Bitcoin went up over 6%. Is it volatile for sure and the volume of trading in bitcoin is heavy. when that volume declines bitcoin tends to drop and then correct (ie go back up) as bargain hunters and others take advantage of the lower price.

That said I would suggest that folks only invest money they can afford to risk losing - not the rent or mortgage money!.

For folks who would like more informed and professional guidance I suggest subscribing to Louis Banesse's Cyrpto Alert nesletter. I find that he and his partner Martin Hutchinson have their feet on the ground and like you seem to steer from the scams and steer folks into the crypto currencies that have a future (and are legit). They only suggest a few and give you the rationale behind their thinking for why these might be good risks - and of course they are always a risk - just like bitcoin.

I have done well with my bitcoin - I bought a few over time and the last one I bought was around $350 about 3 years ago. I can't complain except I wish I had bought more.

If any one wishes to get into crypto currencies I suggest using coinbase. They have have very good security and I have been well served by them. I think the fact that they have mushroomed to about 10 million accounts speaks volumes about their excellence.

I now own 7 other crypto currencies and each one has done well but bitcoin has outshone them all for me. I wish with Etherum a close second. I believe some of the newer crypto currencies show great promise has they address many of the problems bitcoin has which you addressed in your articles. We shall see.

Again only invest money that you could afford to lose and be safe.


Posted by:

Glen
28 Aug 2017

There are a few primary concerns surrounding bitcoin that potential investors should be aware of. First, it is not backed or regulated by the good faith of a government or other entity. This stands in stark contrast to the dollar, yuan, pound, and other forms of currency used around the globe. So, many people view bitcoin as something akin to Monopoly money, because it is neither a fiat currency nor is it based on something of tangible value like gold. In other words, a bitcoin is worth exactly what people perceive its worth to be. While, in a sense, this is true of any currency, the value of a bitcoin is much more fickle than other forms of currency because of its unregulated nature.


Posted by:

Bob
28 Aug 2017

Nope, don't want anything to do with bitcoin... too much room for fraud, hacked, and it's not backed by anything. The more I read about bitcoin the more I don't like it.


Posted by:

Bob K
28 Aug 2017

WOW! Computer know-how, and investment advice at the same time. What's next? Cooking with Bob?
Bob, don't get me wrong, I love you, but don't get too close to the Sun, and too far away from what you are known for.
-Bob K.

EDITOR'S NOTE: Bitcoin is software, networking and digital currency. Not really an "eclipse" of my areas of expertise. :-)


Posted by:

Bob D
29 Aug 2017

Bitcoin is for fools, yes you could have made money if you purchased it earlier But the bottom line is it is fiat currency like all other money which is backed by nothong and will someday be worth nothing.


Posted by:

Robert
29 Aug 2017

Proper currency fits in your wallet, it's instant access and is backed up by the bank.
Bitcoin with no government regulation and being open to rule change or fraud by faceless people I believe like like pyramid selling the last in will eventually get burned.
It's a very risky gamble


Posted by:

Charles
29 Aug 2017

House of cards. It will fall. There is no shortage of people willing to relieve you of your money. A fool and his money is soon separated, the real question being; how did they ever get together.


Posted by:

BobD
29 Aug 2017

"Bob D" (not me) a little earlier today noted that Bitcoin is fiat money like all other money. True! All money has value only to the extent that people agree on its value. Like all money, Bitcoin is created from nothing, not even "thin air". U.S. dollars are created because Congress says so, hoping that taxes will control inflationary pressure.
(Aside: What is gold's value? It's nice to look at, and it dislikes corroding. What are diamonds' value? Nice to look at, and handy for sharpening things. Other than that, gold and diamonds are pricey because people say so.)


Posted by:

BobD
29 Aug 2017

Speaking of fools and their money (thanks, Charles!), I traded US $100 for a fraction of a Bitcoin a few weeks ago. It is now "worth" something like $160, which proves there are bigger fools than I, which is heartening.


Posted by:

Bob
29 Aug 2017

Could it be that some physicist will come up with a way to purchase it earlier. Also can Bitcoin be short sold?


Posted by:

Lady Fitzgerald
29 Aug 2017

The bitcoin craze differs very little from the Tulip Mania of the 17th Century, the main difference only being the tulip mania was based on a perishable commodity whereas Bitcoins are fiat currency created out of nothing. It's no different from the stock market prior to the 1929 Crash, the dot-com Crash, or the crash of 2008. It's as rotten morally and unstable as pyramid schemes for pretty much the same reasona.


Posted by:

B Frank
30 Aug 2017

Bob, can you comment on the block-chain technology associated with bitcoin? So many companies are now using this technology, invented for bitcoin, for other things. Doesn't blockchain tech have something to do with the value of bitcoin? Also, many large companies are now dealing extensively in bitcoin transactions--how does that affect its value?


Posted by:

Tricky
31 Aug 2017

Bitcoin and a few others are here to stay. BTC are useful. There is real value in bitcoin technology. Becoming wealthy from buying/trading/holding BTC is a separate issue that will continue till it comes to equilibrium. That may not happen until about the time the last coins are mined.

The losses in the main will be attributable to the copy cats that offer no real use and are intended to gain wealth only for the creators.


Posted by:

Joe M
31 Aug 2017

Bitcoin? As if it's the only digital currency out there? What about Ether? Ripple? Etc?

My money is on Ripple.


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