Why invest in bitcoin? While the cryptocurrency’s price has seen major lows in recent years, it’s also reached incredible highs.
Bitcoin investing offers exposure to a new asset class known as cryptocurrencies. Based on blockchain technology, the digital currency has many advantages as an investment, largely owing to its decentralized and hyper-portable profile.
The best known of the myriad crypto assets, bitcoin isn’t a fiat currency stored in banks — many believe that gives the cryptocurrency leverage because it isn’t beholden to the vulnerabilities of national currencies. Furthermore, international transactions with digital currencies can be completed quickly and cheaply compared to traditional currency transactions.
While some would argue it’s not quite on par with gold, others have positioned bitcoin investment as an emerging safe-haven strategy — a more secure place for investors to park their wealth in the midst of economic storms. Indeed, bitcoin’s popularity soared from 2016 to 2017, when its price skyrocketed from around US$570 in August 2016 to about US$4,765 in August 2017.
In 2020, the digital currency’s price rose by about 300 percent over the 12 month period, closing out the year at just over US$29,000. As the impact of COVID-19 continued, the bitcoin price pushed forward on its bull run into 2021, reaching its highest point for the year so far in April at US$64,863.
While that might sound promising, it’s important to remember that the digital currency has downsides that call its safe-haven status into question. For example, it’s been affected by scams, as well as deep price plunges — most recently when it slid alongside stocks in 2020.
Given these factors, why invest in bitcoin? Here the Investing News Network breaks down the essentials, including what the market currently looks like and its future outlook.
Why invest in bitcoin?: The regulatory landscape
While bitcoin’s position as a safe haven is still up for debate, its high-risk nature is no secret. In the early days of bitcoin trading, the alternative currency faced resistance from governments around the world. In 2014, the US Internal Revenue Service took action to discourage the use of bitcoin, ruling that “general tax principles applicable to property transactions apply to transactions using virtual currency.” Ultimately, the fluctuating value of bitcoin could trigger capital gains taxes for consumers.
As bitcoin has gained popularity with investors, government regulatory agencies such as the US Securities and Exchange Commission (SEC) have made moves to curb that propensity for risk. In July 2017, the SEC ruled that initial coin offerings should be regulated and subject to federal laws.
In mid-2021, the SEC Chairman Gary Gensler said the agency will regulate cryptocurrency markets to the maximum extent possible under its current authority. Gensler also called on Congress to grant the SEC more scope and resources to oversee this market. “We just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West,” he said.
Other US government agencies — including the Commodity Futures Trading Commission and the Federal Trade Commission — have weighed in on cryptocurrencies, but few formal regulations have been enacted. According to Global Legal Insights:
“Generally speaking, Federal agencies and policymakers have praised the technology as being an important part of the U.S.’s future infrastructure and the need for the U.S. to maintain a leading role in its development. While there are still some skeptical of the technology’s promise, many policymakers have publicly acknowledged the risk of over-regulation. Others have cautioned lawmakers from passing legislation that would drive investment in the technology overseas.”
At the state level in the US, the government approach to regulating cryptocurrencies is mixed. Some state legislators have taken a pro-crypto stance. For example, Wyoming, which has gained notoriety as “the most crypto-friendly jurisdiction in the country,” has exempted digital assets from property taxation, while in 2018 Ohio became the first state to allow its citizens to pay their taxes in bitcoin.
On the flip side, Global Legal Insights explains that states such as California and New Mexico have warned against cryptocurrency investing, with New York going so far as to pass highly restrictive laws that resulted in some crypto companies bailing on the state.
China’s response to bitcoin and other digital assets as alternative currencies has been to outright ban initial coin offerings and cryptocurrency exchanges, though it is still not illegal to hold, buy or sell cryptocurrencies. In stark contrast to China, Japan officially recognized bitcoin as a method of payment in April 2017, pushing the digital currency’s valuation up over the US$1 billion mark.
The Japanese government recently instituted changes to tighten its regulations. However, statistics from 17 cryptocurrency exchanges released in July 2021 show that interest remains strong — in fact, there are upwards of 3.5 million active digital currency investors in Japan.
How the regulatory landscape for bitcoin will be shaped in the future remains to be seen, but one thing is for sure. “Crypto and regulation are strange bedfellows,” said Daniel Masters, chairman of CoinShares, a digital asset investment firm, and former global head of energy trading for JPMorgan (NYSE:JPM). “To get anything regulated in crypto, you have to push a very heavy ball up a very tall hill.”
US Congress is considering taking on that feat with the consideration of cryptocurrency tax as part of an infrastructure bill. Industry groups have not been shy about expressing their concerns.
Why invest in bitcoin?: Price activity
Bitcoin reached its first major all-time high on November 29, 2013, when it was valued at US$1,137. Since then, it has experienced various highs and lows. In 2017, bitcoin’s price rose more than fivefold, jumping from US$997 in January to US$5,013 by September 1.
If you’re still asking yourself, “Why invest in bitcoin?” perhaps consider this — as the cryptocurrency’s price has risen over the last couple of years, bitcoin has begun rivaling traditional safe-haven assets such as gold and silver. Bitcoin surged ahead of the gold price for the first time ever in March 2017, trading at US$1,268, while the precious metal‘s price was US$1,233 an ounce.
Gold had its biggest safe-haven moment in years during the COVID-19 pandemic, starting 2020 at US$1,519 and breaking its all-time high by trading up over the US$2,000 level. The bitcoin price was over US$11,200 at that time after trading at US$7,152 at the start of the year. And when bitcoin zoomed past the US$64,000 level in April 2021, gold was down about US$270 from its most recent record high.
No wonder there are analysts who think the fundamentals are bullishly in favor of stronger bitcoin prices in the months and years ahead.
Why invest in bitcoin?: Market outlook
According to Capital.com, the outlook for the bitcoin market remains bullish, as per information from Fidelity Digital Assets, Wallet Investor and Digitalcoin. In its 2021 Institutional Investor Digital Assets Study, Fidelity Digital Assets found that 71 percent of institutional investors “expect to buy or invest in digital assets in the future,” while more than 90 percent of that group “expect to have an allocation in their institution’s or clients’ portfolios within the next five years.”
Wallet Investor forecasts that the bitcoin price will average US$52,322.10 by the end of 2021, rising further in 2022 to pass its record high and reaching US$79,090 by the end of that year. The algorithm-based site also sees bitcoin prices averaging US$171,665 in five years.
For its part, Digitalcoin forecasts an average price of US$62,351.23 in 2021 and US$80,860 in 2023, before a rally to US$122,201.98 by 2025 and US$184,933.09 by 2028.
But bitcoin is not without its naysayers. One of the most influential is Warren Buffet, who has repeatedlyflat out said he would never own one single bitcoin. Most recently, the Oracle of Omaha said buying bitcoin “is not investing,” but rather “speculating.”
The Investing News Network is interested in hearing your opinion on bitcoin investing, as well as whether or not you’re ready to invest in bitcoin. Let us know in the comments.
This is an updated version of an article originally published on the Investing News Network in 2015.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.