Should You Invest In Bitcoin Now?
The popularity of bitcoin has exploded since it was invented in 2010. Starting the new trend of blockchain based cryptocurrencies, it has captured the interest of investors looking for an alternative to more traditional investments.
What is bitcoin?
It is the first cryptocurrency, which is a blending of two words, cryptography and currency. It was created by Satoshi Nakamoto, which is widely accepted to be a pseudonym. The identity of the creator has never been revealed, although Australian entrepreneur Craig Wright put forward a claim in 2016. To others, Dorian Nakamoto and Nick Szabo are also suspected of being the creators of bitcoin.
There are two ways of obtaining bitcoin (and other cryptocurrencies): buying or mining. Buying bitcoin is as easy as signing up with a cryptocurrency exchange. Here, you are buying bitcoin that belongs to someone else.
Mining, on the other hand, is about obtaining new bitcoin for the market. All cryptocurrency is harvested by solving complex algorithmic problems. In layman terms, you get a powerful computer to do very difficult mathematical calculations, and you are given a small amount of bitcoin as a reward.
Cryptocurrencies work on the concept of a blockchain, which is basically a publicly available ledger. Anyone can view the ledger to verify the authenticity of transactions and see where each particular bitcoin – or part of a bitcoin – is being kept.
Now, let’s clarify something: bitcoin transactions are both anonymous and transparent at the same time. Each transaction is traceable in that you always know where it is and where it has gone. However, they are anonymous in the sense that you won’t know who owns the digital wallet they are in without permission from the owner.
Why is bitcoin so valuable?
The goal of bitcoin – and other cryptocurrencies – is to become a new medium of exchange. Similar to how traditional money – like ringgit and dollars – works.
However, unlike money that is controlled by a central bank, the value of bitcoin is not backed by anything. It’s value is purely determined by people believing it has value and therefore using real world money to buy it.
The one thing that bitcoin has to help control its value is scarcity. There is a finite amount of bitcoin in the world – even if not all of it has been made available. The idea is that bitcoin not only has a fixed amount, but is also increasingly difficult to obtain.
Investors have lately decided that cryptocurrency is a good place to invest in times of economic uncertainty. The reasons for this vary, but the primary reason is that these decentralised currencies offer better returns in times when businesses are being bailed out and government controlled currencies are being devalued due to reduced interest rates.
In a sense, investors view bitcoin and its ilk the same as gold. However, unlike gold, bitcoin is not backed by any physical commodity and can therefore lead to bigger swings in value.
What are the benefits/drawbacks of bitcoin?
|Very accessible - cryptocurrency exchanges make it easy to start buying bitcoin||Unregulated - the use of bitcoin itself is unregulated, leaving you legally unprotected should anything go wrong.|
|Very liquid - it’s easy to cash out and sell your bitcoin if you need money.||Limited practical use - you cannot use your bitcoin to buy things. It must be converted to regular money first.|
|Potentially high returns - bitcoin tends to peak at extremely high prices.||Extremely volatile - bitcoin prices can drop very quickly and reach very low prices.|
|Security - you always know where your bitcoin comes from and where it goes.||Security - it is impossible to reverse transactions and your bitcoin cannot be recovered if it is stolen.|
Should you mine for bitcoin?
If you’re relatively tech savvy, mining bitcoin for yourself is another alternative. This takes quite a bit of effort, but is popular with those who aren’t as interested in simply buying bitcoin and waiting for the price to increase.
Bitcoin mining is necessary for bringing in fresh currency for new investors, which can be very lucrative for the people doing the mining.
That said, you need a lot of computing power to mine any amount of bitcoin. This means that you will be using a lot of electricity each month. How much extra varies on the size of your operation, but the BBC reported that the global mining effort consumes the same amount of energy as Switzerland each year.
In other words, you may not be spending money to buy bitcoin if you’re trying to mine them – you will definitely be paying for it through your electricity bill.
Should you invest in bitcoin?
From a practical point of view, bitcoin is no different from any other high-risk investment. This means whether or not you should be investing in it depends on your own risk profile and your investment goal.
However, you should also accept that bitcoin’s value is solely determined by investor interest. Unlike investing in anything else, cryptocurrency is not linked to any tangible asset. Bitcoin’s entire value is based on people believing that it has value.
Economist David Rosenberg points out that the peak prices in 2020 are a massive bubble driven by a herd mentality. He also points out that most investors and economists don’t really know anything about bitcoin, how it’s mined, or even who made it.
In other words, if you want to invest in bitcoin, go ahead. Treat it like any other investment and avoid trying to time the market. Instead, it is likely better to make periodic investments to even out your returns.