Why invest in bitcoin? While the cryptocurrency’s price has seen majors lows in recent years, it’s also reached incredible highs.
Cryptocurrencies are an exciting and relatively new opportunity, and bitcoin offers an opportunity to invest in this asset class. Based on blockchain technology, the digital currency has many advantages as an investment, including its hyper-portable and decentralized nature.
The best known of the crypto assets, bitcoin isn’t a fiat currency that is kept 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 not quite on par with gold, some analysts have posited bitcoin investment as an emerging safe-haven asset — a more secure place for investors to park their wealth in the midst of an economic storm. But others are hesitant to give bitcoin safe-haven status given the digital currency’s deep price plunges, most recently alongside sliding stocks in early 2020.
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. As of August 2020, the digital currency’s price was at the US$11,775 level. Bitcoin’s market cap has also risen exponentially in the last four years, increasing from about US$9 billion to a whopping US$217.5 billion.
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 safe-haven status is still up for debate, its high-risk potential is not. 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 tax 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.
“The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us,” SEC Chairman Jay Clayton said in a release at the time. “We seek to foster innovative and beneficial ways to raise capital, while ensuring — first and foremost — that investors and our markets are protected.”
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 reports 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. In early 2020, the Japanese government instituted changes to tighten its regulations, which may see some of the country’s 23 approved bitcoin exchanges exit the market.
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.”
Why invest in bitcoin?: Price activity
Bitcoin reached its first 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 first 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.
In the midst of the COVID-19 pandemic, after starting the year at US$1,519 per ounce, gold is having its biggest safe-haven moment in years, breaking all-time highs by trading up over the US$2,000 level. The bitcoin price was up over US$11,200 at that time after trading at US$7,152 at the start of the year.
Bitcoin’s price still has further to go before it once again hits its all-time high of US$19,783, which it reached in mid-December 2017; however, 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
Moving forward, there are certainly a growing number of opportunities in bitcoin. For those who genuinely believe in the potential of bitcoin to become a major currency or inflation hedge, this may constitute an excellent time to invest.
In August 2020, full-time trader Adam Mancini said that he sees US$15,000 as the next big target for the bitcoin price. “(Bitcoin) broke out of a multi-year bullish triangle with force,” Mancini tweeted. “Bitcoin may be the new kid on the block but the same old classic patterns that apply to all financial assets still apply. (The) trend is up with $15k next target.”
Real Vision CEO Raoul Pal thinks bitcoin is a better investment than most traditional assets, including gold. “In fact, only one asset has offset the growth of the G4 balance sheet. It’s not stocks, not bonds, not commodities, not credit, not precious metals, not miners,” said Pal. “Only one asset massively outperformed over almost any time horizon: Bitcoin.”
But bitcoin is not without its naysayers. One of the most influential is Warren Buffet, who has flat out said he would never own one single bitcoin. Interestingly, the great investment guru had also sworn off gold in favor of company and bank stocks. But recently, Buffet’s Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) offloaded bank stocks, including JPMorgan Chase and Goldman Sachs (NYSE:GS), to take a position in Barrick Gold (NYSE:GOLD,TSX:ABX).
Could the Oracle of Omaha flip his position on bitcoin as well? The Investing News Network is interested in hearing your take on this question, as well as your thoughts on 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.