The digital currency bitcoin received a lot of media attention when it rallied from under $100 to over $1000 per bitcoin from August 2013 to November 2013. This rally attracted a lot of speculators and investors to the world of cryptocurrencies. However, bitcoin is not only a speculative asset. Bitcoin is becoming a viable alternative to fiat currencies as a means of paying for goods and services. Over 100,000 merchants worldwide accept bitcoin ranging from trendy cafés in London to e-commerce stores in China. That begs the question: “Is a bitcoin investment a good idea?”
What is bitcoin?
Bitcoin is the world’s first decentralized digital currency. It was introduced to the world in 2008 by an anonymous developer with the alias Satoshi Nakamoto.
Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing (also known as mining) of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls bitcoin and everyone can take part. Through many of its unique properties, bitcoin allows exciting uses that could not be covered by any previous payment system.
To learn more about Bitcoin you can enroll in the free bitcoin course by Draper University and Zapchain.
Where can you buy bitcoin?
Bitcoin can be bought on cryptocurrency exchanges, such as Kraken, BitStamp or GDAX. Alternatively, you can purchase bitcoin via the online wallet provider CoinBase (where I purchase my bitcoins) or you use LocalBitcoins.com.
Should bitcoin be part of your portfolio?
Cryptocurrencies as an asset class are highly volatile. Bitcoin is no exception. The volatility of bitcoin surpasses that of most fiat currencies and severe price shocks have been witnessed regularly since its inception. Having said that, volatility creates profit-making opportunities. When bitcoin rallied from $100 to $1000 in late 2013 many people quietly became bitcoin millionaires. At the same time, when the price of bitcoin dropped from
$1000 in December 2013 down to around $400 in April 2014 many people lost substantial
amounts. Since then, bitcoin has dropped to around $200 until it rallied again in 2016 to
reach a level at around $650 in July 2016.
I personally hold a small amount as a speculative long-term punt and occasionally add to my holdings as I believe that bitcoin will remain the leading cryptocurrency and will eventually become an acceptable means of payment internationally. Especially in light of the fact that the supply of bitcoin is finite (at 21 million), I can see the price of bitcoin still having substantial upside in the long term.
Having said that, the price could also collapse close to near nothingness in a few years time if regulators across the world ban it as a means of payment (as it has happened in several jurisdictions, such as Russia and to a degree China) or a superior digital currency takes its place. Therefore, I would only every recommend investing an amount that you would be ok to lose entirely.
In conclusion, I would say that bitcoin doesn’t need to be in your portfolio. However, if you want to put a small percentage of your overall investment portfolio into a very risky asset class that could potentially generate very high returns long-term, having a small holding of bitcoins is surely an option.