In a world full of speculative investments, bitcoin is quickly rising to the top of the pack as a store of value to keep an eye on. One of the most unique inventions in the last decade, bitcoin is beginning to look like the disruption of the banking industry we’ve all been waiting for. Bitcoin exchange is enabling a variety of alternative investments and strategies that no one would have dreamed of several years ago. The best way to look at it is if bitcoins are just an online currency that can be transferred using your phone or computer instead of a financial intermediary, then they are essentially bets against the banking system.
The Investment Thesis for Bitcoin
The interesting thing about bitcoin is that its biggest weakness is also its biggest strength. Unlike other high profile investments, it is not backed by anything material. There is no company or country that is in debt to the holder of the bitcoin, and it does not entitle the owner to any sort of claim on a company’s assets. At the same time, because it is not dependent on any single company or government, it is the first truly independent currency. As a currency that doesn’t have a government, there is no one to make poor decisions about the money supply and no worries about the value being affected by the agenda of economists.
The past performance of bitcoin has been full of volatility. The value has varied by orders of magnitude periods of a year, and it’s hard to keep track of where the price is sitting at any given time. This is expected to change as it enters the mainstream and nears the point where no more bitcoins are being mined. When this happens, supply will have become a constant, and it will merely be a matter of demand. This situation is what most long-term investors are waiting for, and is the thesis behind a buy-and-hold strategy.
In the short-term, many have found it profitable to buy bitcoin at its lows and then take a profit if it goes up enough. Volatility comes from the lack of any observable fundamental value (such as company earnings) and the small market size relative to all the other investments available in the world. This volatility has attracted investors who wish to speculate on the price of bitcoins, but they aren’t really long-term believers in the value of bitcoin as an investment vehicle.
Bitcoin is often seen as a hedge against “end of the world” scenarios, which doesn’t quite make sense. You can see it being useful with the collapse of any single government, but if the power grid gets knocked out, bitcoin does as well. Although not important to you, this context is important when thinking about the extreme reasons supporters believe in bitcoin.
How to Invest in Bitcoin
If one is looking to invest any significant amount of money into Bitcoin, there are several ways to do this. The simplest way is to just purchase it through Paypal or a credit card and keep the money in your “wallet”. This is a little less scalable and secure, and also isn’t friendly to investors that aren’t tech-savvy. Bitcoin is completely secure in that it can’t be hacked, but users have to take special precautions to ensure that their private key is not compromised. Unlike a bank, which will reimburse you for any fraudulent occurrences, any potential bitcoin user is on their own.
This is why one might consider an alternative such as one of the several Bitcoin investment trusts that are popping up around the world and provide a new level of accessibility to Bitcoin. Challenges exist with buying, storing and safekeeping bitcoin, so by finding a fund that has already solved these problems, you can eliminate most of the security risks that exist with bitcoin. The Winklevoss twins (of Facebook fame) are in the midst of establishing a bitcoin ETF that could revolutionize the industry, and they see bitcoin as “better than gold”.
Rather than buying bitcoin, one could take steps to “mine” them. This is the term for using your computer or a network of computers to try and find the predetermined code that allows you to register a new bitcoin to your wallet. By setting up your own mining operation or investing money in one, it is possible to partake in the bitcoin craze without explicitly speculating on the price or taking a long position.
The Future of Bitcoin
One of the many advantages of Bitcoin is its ability to not be monitored closely by the government. This has made it easy for users to move money across borders and avoid taxes. Only recently has the government announced its plans to take steps to monitor “Bitcoin transmitters”. These include any exchanges or platforms that allow for the transfer of money using bitcoin. This is important to understand because any increase in the regulation of bitcoin will also likely result in an increase in the cost of investing in it.
Most of all, it is important to realize that right now a lot of bitcoins value is in its hypothetical uses in the future. Very few companies currently accept it, and that is not set to change any time in the near future. Right now one can mostly look at companies adopting bitcoins as a signal of their willingness to be forward thinking rather than a sign that the currency is catching on. It is highly unlikely that Victoria’s Secret or Home Depot are frequently being asked if customers can settle their bills using the virtual currency.
The true question about bitcoin is when it will be adopted by regular citizens, because this is the point where it will truly take off. Thought leaders in the blockchain industry have released an ebook that explains their ideas of what it will take to bring bitcoin to the mainstream, and the consensus is that it will occur quite soon. During 2016, bitcoin gained a lot of popularity due to the increased level of political unrest that was occurring. Demand is the variable to focus on, so any potential investors are advised to keep an eye on the indicators of bitcoin being adopted by the mainstream.
