Bitcoin Investing Explained
Though Bitcoin is discussed as a decentralized currency, it behaves more like a speculative asset. Qualities of a good currency include:
- stability compared to other major currencies
- apolitical issuing authority
- recognition and demand by institutions and people
Though Bitcoin is thoroughly “apolitical” and is recognized by individuals and governments alike, it fails on the stability metric. The Bitcoin/USD price shows tremendous volatility since about 2017, priced between a few hundred USD/bitcoin to over 50,000 USD/bitcoin since 2014. By comparison, volatility between the dollar and euro fluctuated only between 1.00 and 1.50 USD/Euro in the past ten years. Less stable currencies show more fluctuation, but unless they are failing currencies there is nothing like swings of thousands of percent relative to the USD.As such, the first rule of investing in bitcoin is that don’t trust the price level to stay even approximately flat beyond the short term.
Cryptocurrency Supply Considerations
While the number of Bitcoins is capped at 21 million, other cryptocurrencies that fulfill the same function are open-ended and practically unlimited. Think of Ethereum, Monero, and Dogecoin, to name a few. As such, while Bitcoin can go up in price, don’t expect a fortune going long on Bitcoins purely on the basis of this or any other coin-specific supply cap.
When investing in any asset, consider its scope of use. For instance, gold may be used as a safe-haven “hiding spot” for money or in industry, copper is only used in industry, oil is used in virtually all machinery as fuel and lubricant, corn and soybean futures reflect demand for food, company stock represents claims on a company’s profits and dividends, bonds as claims to regular principal and interest payments high on the capital structure pyramid, and so on. Bitcoin is used primarily in speculation.
Bitcoin’s volatility is its undoing as a currency. Regarding speculation, consider the wide availability of other speculative instruments: options, penny stocks, other cryptocurrencies, even lottery tickets. Given this weighing towards greater supply of Bitcoin and similar speculative vehicles relative to demand, stay away from long-on-Bitcoin trades to any substantial extent. Be sure to keep an eye on sudden price movements.