It’s impossible to watch the news or go online lately without hearing about the Bitcoin rage. On a seemingly unstoppable rise, Bitcoin prices have grown from $1,000 per coin at the beginning of 2017 to over $17,000 per coin at the close of the year. Analysts predict the rise will continue, with some even predicting values of $20,000 or more per coin before we see any drop.
This leads many potential investors to wonder if they are missing the boat by not purchasing bitcoins. If you are in this camp, there are a few things you should be aware of. But first, it’s important to understand what exactly Bitcoin is.
Bitcoin is a form of cryptocurrency (a digital or virtual currency). Though not physical currency like the dollar bills that are regulated by the government, cryptocurrency can be used as peer-to-peer electronic cash to pay for goods and services through public digital messages. Cryptocurrency can be used worldwide and is not affected by exchange rates or other issues that make most global currencies difficult to navigate.
In addition to the ability to use cryptocurrency to pay for goods and services, you can also purchase bitcoins as an investment. They are similar to other commodity investments such as gold, oil, fine art, and agricultural products. As with other commodities, bitcoins are worth whatever the market determines them to be worth—which makes them potentially volatile.
When something takes off like Bitcoin has, it creates a bubble. And, just as we have seen with technology and the housing market, bubbles are bound to burst. The trick is figuring out when the bubble will burst and getting out before this happens. Unfortunately, no one knows when the Bitcoin bubble will go from lucrative to bust. Some believe it is bound to happen any day while others give it a year or more to continue to grow.
A Risky Gamble
One of the riskiest aspects of investing in commodities like Bitcoin is that you are betting on appreciation. The only way you can make money on Bitcoin is if the price continues to rise. This differs from investing in other areas like real estate or bonds. These have actual value and provide the opportunity to generate cash. Bitcoins have no inherent value as bonds and property do. That means that if the prices were to crash, you would have nothing to show for your investment.
Commodities depend on price appreciation, and price appreciation depends on market demand. To really generate a return on investment, commodities must be purchased when they are at market bottom and sold when they near market top. While Bitcoin has skyrocketed and is not anywhere near market bottom, no one knows where they will top off. You could potentially buy now and sell a few months down the road to rake in some money. You could also buy now and the bottom could drop out of the market, leaving you with a lot of useless bitcoins.
So, what’s the answer? Most advisors will tell interested investors that there may still be money to be made investing in Bitcoin—but don’t count on it. It’s a risky investment and one that should only be made by those who can afford to lose whatever they invest. Those who are curious about this new investment opportunity may want to take a chance and buy some bitcoins just to see what they will do over the next few months. However, counting on Bitcoin to fund your retirement is a foolish and ill-advised endeavor.
Should you invest in Bitcoin? If you have discretionary funds that you can stand to lose and if you plan to stay up-to-date on the cryptocurrency bubble, then the answer is yes. But remember, be ready to sell at any moment.