Bitcoin has been around for a decade, and it’s had its shares of ups and downs. Bitcoin’s December 2017 high of almost $20,000 is yet to be revisited though but not entirely out of the picture to some investors — some even predict of a Bitcoin run-up to fifty grand. It could be possible since the cryptocurrency is still highly volatile but it can plummet in quadruple digits on a single day too! This leads to the question, “should you get in on this crypto game?” You’ve probably even asked, “Is Bitcoin a good investment?”
Well, this article will hopefully clear your doubts about whether Bitcoin is indeed a profitable investment for you to make.
Defining what investment means
Before concluding whether Bitcoin is a good investment or not, you must first be able to explain what investing is. Because the meaning of “investment” varies between individuals.
Investopedia defines an investment as “an asset or item acquired with the goal of generating income or appreciation.”
In other words, for you to consider if an asset is an investment, it should produce income that you can depend on, or you must be able to sell it at a higher price later on.
What kind of assets produce income?
Bonds, shares of companies, businesses, and real estate (if it earns rental income) are just a few examples of assets that produce income.
What kind of assets appreciate in value?
Similarly, assets that can be sold for a profit are also bonds, shares of companies, businesses, and real estate. Precious metals can be sold at a higher price too. However, there’s plenty of debate whether something like gold can be classified as an investment, but this article will not cover that.
As for Bitcoin, it falls under assets that appreciate in value.
But what is a good investment?
It depends on who you ask. If you were to ask billionaire stock investor Warren Buffett, he’d probably tell you that a good investment would be a company with a business model he can understand, has a long-term competitive advantage, and can be bought at a cheap price.
If you were to ask hedge fund billionaire Ray Dalio, maybe he’d suggest creating a portfolio of uncorrelated assets so that you mitigate risk as much as possible.
Or, if you’d seek the advice of Quantum Fund’s co-founder Jim Rogers, gold would likely be his recommendation.
Investors have varying views for preferring one asset over another. It could be that an investment that provides consistent income is more attractive than an asset that only goes up in value if another investor paid a higher price for it.
Or, it could be that there’s some long-term value associated with an asset that has been overlooked. So, depending on who you ask, the answers may differ.
But one thing’s for sure: You should be able to crunch some numbers with an asset, meaning you have to have a sound metric to assess its worth and forecast its value.
Ask yourself, what metric can you use to predict how good Bitcoin will be as an investment?
What is the purpose of buying into the asset?
A particular investor may buy different kinds of stocks: stocks that regularly pay dividends, stocks that are undervalued, and stocks that are poised for growth.
Plenty of investors buy gold because, according to them, “it’s a hedge against inflation.”
Others purchase bonds to weather the volatility of riskier investments in a portfolio like stocks because the return of bonds are more predictable.
With Bitcoin, what do you think is the purpose of betting on the cryptocurrency?
Investing and Time
Another important consideration for an investment is the time. Usually, when people look at an investment opportunity, they tend to look at the time horizon narrowly — like a few months to a couple of years.
If that’s the duration to measure an investment’s performance, then that’s more akin to trading. Not that there’s anything wrong with trading, but time is what a good investment requires to be in full blossom. Expecting your investment to return tenfold within the next year is unconscionable.
In addition to that, trading follows a different methodology, and the same principles of investing may not apply to trading.
Bitcoin’s purpose is to enable digital transactions using a currency that isn’t overseen by a central authority. And, as a currency itself, it can’t produce income. It only goes up in value because others are willing to pay a higher price for it.
Its real value can’t be determined either since there isn’t much to analyze about the currency other than the fact that its supply (total coins in circulation) is limited and the rewards for people who mine bitcoin decrease over time, a.k.a. Bitcoin “halving.”
It can also be susceptible to a much better payment solution, whether it’d be a new cryptocurrency or a brand new technological breakthrough in finance. Think Libra.
And, all the other factors that affect Bitcoin’s value positively is mostly driven by speculation.
If you buy Bitcoin now, you’re not sure where it’ll be or what will happen to it twenty or thirty years in the future.
And, yet everything is uncertain, debt investments run the risk of default, established companies can go bankrupt, and real estate properties may go bust.
Nothing is for sure.
The best bet on Bitcoin is that if the world drops the current financial system and formally adopts Bitcoin as the world’s reserve currency.
So, is bitcoin a good investment for you to make? By conventional measures, no would be the answer.
Think we’re wrong? Comment your thoughts below.