You’ve probably heard of the rise of Bitcoin in the news lately. The price of one Bitcoin has risen over 1000% in the past year, drawing investors large and small, experienced and inexperienced, to partake in this speculative investment. The rise of Bitcoin and other cryptocurrencies that have sprung up in its wake is nothing short of spectacular, and early investors have been rewarded with astronomical returns in such a short period of time. However, could the party be over? If you’re unsure of whether you should invest in Bitcoin, or still have questions remaining about what it actually is, we’ll cover the basics here and how it potentially could fit into your overall investment portfolio.
Origins of Bitcoin
Bitcoin can be traced back to 2009 shortly after the global recession by a still unknown person who went by the name Satoshi Nakamoto. His goal was to create a completely decentralized currency. A currency that couldn’t be manipulated or governed by a central bank and was completely reliant on a network known as the blockchain. Many detractors of Bitcoin still refer to the anonymity of its founder as a red flag to why it could be a hoax. It’s believed that Satoshi Nakamoto possesses nearly 1 million Bitcoin, putting his current fortune well into the billions.
What is Bitcoin?
As we mentioned above, Bitcoin is a decentralized digital currency used for peer-to-peer transactions. What makes Bitcoin potentially so disruptive is that it’s not reliant on any middleman for people to exchange “money” with one another. Banks aren’t perfect in recording their ledgers of transactions. They’re susceptible to data breaches, freezing your accounts, and fee’s for large transactions, especially across the world. Bitcoin and the blockchain technology it relies on eliminates these concerns. The blockchain consists of a network of computers that constantly verify the ledger with one another. Bitcoin takes the global ledger of transactions out of the control of the banking system and distributes it onto every computer that is connected to the Bitcoin network. Huge financial institutions no longer control the system. Bitcoin gives the USERS of the financial system control.
What’s driving the price of Bitcoin?
The supply of Bitcoin is set at 21 million coins. Because there is a set amount, you can apply the classic scenario of supply and demand. As the popularity of Bitcoin has risen, for its potentially disruptive nature, the demand has increased. Economics 101 teaches you that if you have a set supply and demand increases, the price increases as well. While Bitcoin doesn’t produce anything or have any inherent value, it is considered a currency and a placeholder of value.
While there have been many public detractors to the rise of Bitcoin, their thoughts aren’t without merit. Bitcoin is still extremely volatile to be considered a currency used for everyday transactions. Daily fluctuations north of 5% are common, and a currency can’t hope to become mainstream with that sort of volatility. However, maybe Bitcoin will never be used for everyday transactions, but rather large cross-border money transfers that often are extremely expensive and time-consuming, or more complex financial transactions?
During the past year, cryptocurrency markets have given rise to several other notable digital currency’s such as ether, litecoin, bitcoin cash, and ripple to name a few. All with substantial price increases and rising market capitalizations. Where Bitcoin lacks, these new currency’s could potentially take its place as a more widely adopted option due to better, more recent technology. For example, even lower transaction fees, or quicker transaction times could essentially make Bitcoin obsolete.
Lastly, regulation could stifle adoption. It’s still very unclear how central governments will regulate Bitcoin and other cryptocurrencies. The anonymity it provides for transactions has been a negative media storm in the past for Bitcoin. It was often used on the dark website known as the Silk Road to purchase illegal products. That negative perception still lingers in people’s and governments’ minds.
Should I Invest in Bitcoin?
As with any investment, you should consider your own circumstances first before buying any Bitcoin. You shouldn’t be using your emergency fund, or retirement fund to invest in Bitcoin. It’s still a very speculative investment. However, if you have excess cash flows, and have taken care of other financial priorities, it may make sense to add to your portfolio. Keep in mind that this will likely be your most volatile investment if you’re used to owning stocks/bond type investments.
If you have further questions surrounding bitcoin, feel free to contact us
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR™ and Co-Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!