The huge price surge in Bitcoin over the course of 2017 and the ensuing publicity has led many people to consider investing in the cryptocurrency. There is no definitive answer to whether or not someone should invest in Bitcoin. Like any investment, the answer depends on a variety of factors such as the individual’s financial situation, appetite for risk, and ability to absorb potential losses. However, we will offer some general information on some of the main factors to consider for those who are pondering the question of whether they should invest in Bitcoin.
When deciding to invest in any asset class, be it a property, the stock market, a start-up company, or Bitcoin, the prospective investor must first define their own financial situation and investment needs and aims. Only once those factors have been determined is it time to assess the qualities of the investments under consideration.
All investments are risk-based and there is always the chance that their value will go down as well as up. No one should make any investment without first understanding and accepting that reality. Different asset classes also have different risk levels and even within one asset class, there can be several different risk categories. For example, when investing in the stock market there are stocks that, at least over the longer term, are relatively low-risk. There are others, usually smaller companies, that are quite high-risk and in which an investment is likely to result in either a very good profit or a significant loss.
It is also important to understand that the risk profile of an investment doesn’t control what will actually happen to that investment. An investment that is categorized as low-risk could, in fact, lead to a profit or loss which is greater than another that was categorized as high-risk. The risk profile of an investment only gives an idea of how volatile it is likely to be, given all of the information available.
Understanding Risks
The first thing to appreciate about Bitcoin as a potential investment is that it falls into the high risk/high reward category. That means that it is not a suitable investment with a view to pension savings or any other goal that means the investor is relying on the investment to support their lifestyle and provide an income. It must be considered as a speculative investment and the investor should be prepared and willing to write off the entirety of the sum invested.
If Bitcoin becomes further established and used more widely than it is now then the likelihood is that in the future each Bitcoin will be worth more than it is now. Depending on how much traction Bitcoin gains in coming years, there is a very wide potential range of its future value.
Bitcoin could also lose momentum. That could be because another cryptocurrency or cryptocurrencies become the preferred option in future. Cryptocurrencies as a wider asset class may also generally fall out of favor, either because of a new alternative or the continuation of the status quo dominance of the fiat monetary system.
There are many different opinions on what the future holds for Bitcoin and arguments with merit for lots of these possible scenarios. No one really knows with any certainty what the future holds for Bitcoin. As such, an investor in Bitcoin must do their own careful research. Examine and weigh up the arguments for and against Bitcoin and the future role of cryptocurrencies in the international monetary system. Come to a carefully considered personal conclusion on which scenario or scenarios seem most likely to you.
If you come to the conclusion that Bitcoin has a reasonable chance of a bright future and wish to invest on that basis, keep in mind you could be wrong. Only invest a sum of money in any Bitcoin investment that will not result in any impact on your lifestyle or general financial security in the event that the investment doesn’t work out and a part or all of the initial investment is lost.
How to Invest in Bitcoin “Stock”
The simple answer to this common question is that you cannot. Stock investments can only be made in companies, and even then the company must be publicly listed on a stock exchange for the general public to be able to buy stock in it. There is no ‘company’ behind Bitcoin, either publicly-listed or private, so, stock in the cryptocurrency cannot be bought and sold.
Bitcoin is based on a decentralized open source software run on blockchain technology. It has been built to operate independently without any company or other central authority operating or controlling it. Changes to the underlying software can be made but only if more than 50% of Bitcoin owners support these changes. This system was created to ensure that Bitcoin as a cryptocurrency is run as a majority democracy and the interests of Bitcoin owners and users cannot be compromised in the interests of a minority.
There are currently three ways to gain investment exposure to Bitcoin:
- The first is to buy some Bitcoin, which can be done on a Bitcoin or cryptocurrency exchange and is a relatively simple process. The Bitcoin can then subsequently be sold on the same exchange or elsewhere.
- The second way to invest in Bitcoin is through the recently released Bitcoin futures derivatives contracts available on the CME and Cboe exchanges, which are both regulated in the USA. However, derivatives such as futures are high-risk, complex investment instruments and are therefore only suited to investors who have experience trading financial markets.
- The third way to invest in Bitcoin is through a cryptocurrency ETF. ETFs are traded on the stock exchange in the same way as company stocks. There are ETFs that track only Bitcoin’s price, such as the Bitcoin Investment Trust provided by Grayscale Investments, and there are ETFs that hold a selection of different cryptocurrencies.
The advantage of investing in Bitcoin through an ETF is that anyone with a stockbroking account can do so easily without having to set up an account and wallet on a cryptocurrency exchange. Selling the ETF then also doesn’t rely on the infrastructure of a cryptocurrency exchange, which could encounter difficulties if many holders all want to sell at once. The disadvantage to an ETF is that they are often priced a significant premium to the underlying price of Bitcoin.
How Much Does Bitcoin Cost?
The cost of one Bitcoin changes all the time and is often quite volatile. Bitcoin’s exchange rate has risen or dropped over 30% in a single day on several occasions. Over the course of 2017, the cost of one Bitcoin rose from around $1000 in January to almost $20,000 in December. As of the second week of January 2018, the cost of one Bitcoin has already varied between around $13,000 and $17,000.
Sometimes, there may be small variations in the price quoted for Bitcoin from one exchange to the next. Because the infrastructure behind Bitcoin trading is still in development, there is not yet one unified pricing system. As such, differences result due to supply and demand levels on different exchanges at a given time.
Many exchanges offer real-time price charts for Bitcoin as well as several other cryptocurrencies. Their prices are based on the average being quoted over all of the major cryptocurrency exchanges.
