Is Bitcoin a Good Investment?
Bitcoin (BTC) is the world’s most widely used and traded cryptocurrency. As of March 11, Bitcoin is worth around $750 billion in a crypto market worth close to $2 trillion.
The price of Bitcoin is well-known for its extreme volatility. Following modest beginnings in 2009, the currency finally exceeded $1,000 in 2017, then climbed steeply but steadily to an all-time high of nearly $69,000 in November 2021. It subsequently fell as low as $35,000 in January 2022 before rising to over $39,000 today.
Bitcoin bulls, on the other hand, haven’t been deterred by the volatility. In January, a Goldman Sachs analyst projected that Bitcoin might reach $100,000 if it is acknowledged as a gold substitute.
While Bitcoin may not yet match gold’s standing as a store of value, the crypto monarch is steadily gaining popularity and might have a place in your investing portfolio depending on your objectives and risk tolerance.
If you’re considering investing in Bitcoin, keep the following in mind:
• What role does Bitcoin play in your financial portfolio?
• The dangers of cryptocurrency ownership
• Bitcoin’s long-term prospects.
What Role Does Bitcoin Play in Your Portfolio?
Unlike the stock market, which has established hours for buying, selling, and trading, Bitcoin and other cryptocurrencies are available to purchase, sell, and trade 24 hours a day, seven days a week. Bitcoin may be purchased on a variety of cryptocurrency exchanges. While you may conduct crypto transactions at any time of day, it’s ideal to do it while trading activity is high in order to assure ample liquidity and a good pricing.
Bitcoin has attracted some investors because it is uncorrelated with equities, making it a viable choice for portfolio diversification. However, since Bitcoin’s price is unpredictable, experts argue that having a lesser Bitcoin proportion in one’s portfolio might assist enhance returns without exposing one’s portfolio to too much risk.
According to Alex Chalekian, CEO of Lake Avenue Financial in Pasadena, California, retail investors should restrict their Bitcoin holdings to 1% to 3% of their whole portfolio since it may “lose a lot of value in a short period of time.”
“One of the major motivations for adding Bitcoin to a portfolio is having exposure to a cryptocurrency, which may be a non-correlated asset to the current equities and bonds in a regular account,” he explains.
However, new research suggests that Bitcoin’s connection to equities is improving, particularly as more individual and institutional investors enter the crypto market and more Bitcoin-related assets become accessible to a larger audience.
There are a number of ways to become involved with Bitcoin. You may invest in a Bitcoin exchange-traded fund like the ProShares Bitcoin Strategy ETF (ticker: BITO) or the VanEck Bitcoin Strategy ETF if you feel investing directly in Bitcoin would be too risky (XBTF).
Bitcoin equities, as well as organizations that engage in the crypto sector or have Bitcoin on their balance sheets, may be added by investors. Coinbase Global Inc. (COIN), PayPal Holdings Inc. (PYPL), and MicroStrategy Inc. are among these Bitcoin stocks (MSTR). This method enables investors to increase their Bitcoin exposure while reducing the risk of volatility.
The Consequences of Cryptocurrency Ownership
Because of the huge price volatility, investing in Bitcoin might be difficult for individuals. Bitcoin’s volatility is significantly higher than that of equities. This makes Bitcoin a riskier asset, but given its previous outperformance compared to the S&P 500, many investors are willing to take on a little more risk in exchange for possibly larger profits.
Bitcoin is volatile for a variety of reasons. For starters, there is debate over Bitcoin’s and other cryptocurrencies’ future usefulness.
According to Robert Johnson, a finance professor at Creighton University, Bitcoin is a “very suitable vehicle for someone who is actually a speculative — either a bull or a bear.” BTC might soar rapidly in value, fall again or do both again. Investors can only guess on the future price of Bitcoin since it has no inherent worth, unlike gold, he explains.
Bitcoin is also vulnerable to cyberattacks. Since Bitcoin was released in January 2009 in the midst of the Great Recession, hackers have targeted cryptocurrency exchanges, causing billions of dollars in market value to be lost due to hacking.
It’s critical for environmentally concerned investors to be informed of the environmental effect of Bitcoin activities. Bitcoin mining, which entails confirming transactions and preserving the blockchain network’s integrity, keeps the Bitcoin network running. This technique is known as “proof of work,” and it needs a large amount of computational power in order to operate, resulting in substantial energy usage.
If environmental, social, and governance, or ESG, is a part of your investment strategy, bear in mind that Bitcoin mining might put those ideals to the test.
The cryptocurrency market cap will rise, the crypto-economy will expand, and Bitcoin will gain greater exposure, according to the token’s supporters, as more people feel comfortable with holding crypto assets and dealing in the crypto market.
“As the public’s understanding of Bitcoin grows, more people and financial sector professionals have concluded that it’s time to include Bitcoin in their investment portfolios,” says Ron Levy, CEO and co-founder of The Crypto Company.
Bitcoin is rapidly being seen as a store of wealth, or an asset with long-term worth. Gold has held that status for a long time and continues to do so, but Bitcoin has been challenging it, prompting some to refer to it as “digital gold.”
The blockchain consumes a lot of energy, which is one of the key worries about the Bitcoin network, which employs the proof-of-work consensus. Also, when more Bitcoin investors join the site, there is increasing congestion, and transaction costs may mount up quickly. However, there is a consensus method known as “proof of stake,” which competitor blockchain Ethereum plans to implement in 2022.
If Bitcoin also adopts proof of stake, it may be able to address some of the network’s issues. The idea behind the proof-of-stake consensus process is similar to that of proof of work, however it is more energy-efficient and scalable. This update may improve the performance of the Bitcoin blockchain network and promote greater Bitcoin investor engagement.
Bitcoin’s future will almost certainly be more tightly controlled. President Joe Biden issued an executive order on cryptocurrency regulation in March to provide the US policy on digital assets greater direction and clarity. Advocates for Bitcoin’s widespread acceptance regard this as a critical step in educating the public about Bitcoin and its role in the global financial system.
Biden’s executive order on crypto regulation, according to Levy, is a “major milestone” for crypto, bolstering “the legitimacy and long-term outlook of the field, which bodes good for Bitcoin, which is still king, at least for the time being.”