Is Bitcoin a Good Investment?

The average Bitcoin investor has been through the mill recently. With massive price rises giving them hope of retiring early and buying a Lambo to huge flash crashes that destroy their dreams in an instant. So is it worth putting money into Bitcoin and what does the future hold?

Charting the rise and fall of Bitcoin

In December 2017 the value of Bitcoin soared to a record high of just under $20,000 (£15,750). Just 12 months earlier you could have bought it for around $750 (£590) and about 4 years previous, you could have purchased all the Bitcoin you desired for pennies.

During the its peak, you could not watch TV, surf the internet or read the news without the mention of Bitcoin and how some people were literally making millions by trading the most well known cryptocurrency in the world. It seemed everybody was talking about, even if they had absolutely no clue about how it worked.

However, soon after this astonishing run up in price, things turned sour pretty quickly. Within days of its all time high, Bitcoin crashed to almost half its value at just under $11k (£8,650). Then the inevitable ‘dead cat bounce’ happened, as it is known in trading circles, where price temporarily rebounds after a large fall and Bitcoin recovered to around $17,250 (£13,500).

The bounce in price was short-lived and from the start of 2018, Bitcoin began its descent all the way down to around $6,000 (£4,700) in February.

After such a dramatic price drop you would be forgiven into thinking that it was game over for the shining star of the crypto world. But wait a minute. Yet again, within weeks, Bitcoin somehow defied the naysayers and virtually doubled in price to just under $12,000 (£9,450).

At that point, many people assumed, due to its miraculous recovery, that it had hit rock bottom and price would now ‘moon’ higher as is the term used in the crypto investing community. Exorbitant price predictions of 50k, 100k and even one million dollar Bitcoin were being touted, as the next generation of wannabe trading millionaires piled back into what was being heralded by some as the new world currency.

But, just as these cryptocurrency investors were choosing the colour of a new Lamborghini, Bitcoin decided to take a slow, downward move that has dominated the price chart to date.

Bitcoin YouTube Channels

These months of sideways action in price, has unearthed a new breed of trading guru in the form of the YouTube Crypto Analyst. There are now countless ‘YouTubers’ with channels dedicated to their love of Bitcoin and cryptocurrency in general. Not only do they cover the daily crypto news by discussing the various online articles that are published, but they even delve into the world of trading analysis and price action charting, a pastime once reserved for the boffins at city trading firms. They often use the online TradingView charting software.

For the most part, these YouTube channels are very pro Bitcoin and crypto in general. They often have a bias toward the positive and are constantly trying to predict the next Bull Run. This maybe because they are themselves financially invested in Bitcoin and cannot emotionally conceive that price could indeed fall further. This inevitably skews their view of the virtual currency resulting in an impartial and imbalanced view of the market. Anyone looking to invest in cryptocurrency should take the advice on these YouTube videos with a large pinch of salt.

How do you invest in Bitcoin?

Most retail buyers of Bitcoin do so through an exchange. In the same way you might exchange pounds sterling for dollars, you can exchange your fiat money into Bitcoin. One of the most popular exchanges is called Coinbase, a digital currency exchange broker.

With Coinbase, you can use their website or mobile app to buy your Bitcoin and other cryptocurrency within seconds. Your currency purchase is then held in a digital wallet that holds the private keys to your Bitcoin. Selling your Bitcoin holding is just as easy, with a simple click of a button you can exchange your digital currency back into good old fiat money and have that transferred to your bank. Coinbase makes money by charging you a transaction fee.

Since the start of 2018, mainstream investment has got in on the act. You can now trade Bitcoin futures and this has opened the doors for individuals and trading firms to place speculative bets on which way the currency will go.

HODL and REKT

Up until that point it was cool to HODL Bitcoin. A slang term used by crypto enthusiasts, which simply means hold what you have or as some have suggested, ‘Hold On for Dear Life’. The idea is basically to buy Bitcoin, keep it and ride the waves of price movement until the value skyrockets. If price plummets then you get REKT – short for wrecked, meaning you lose a lot of money.

With futures contracts however, as a trader, you can now short Bitcoin i.e. bet that the price of Bitcoin will go lower. This has created a genuine market of buyers and sellers in the same way as the FX foreign exchange (FOREX) futures market or the stock futures market operates.

In the UK you can also bet on the direction of Bitcoin through spread betting. The majority of financial spread betting companies now offer a host of cryptocurrency pairs to trade. However, due to the volatile nature of these currencies, the spread will often be quite large.

Bitcoin regulation

Recently, a number of firms have applied to the SEC (Securities and Exchange Commission) with a request to offer a Bitcoin ETF (Exchange Traded Fund) to clients. An ETF is a widely used, regulated, mainstream investment vehicle that enables investors to be exposed to an asset’s valuation without having to directly own it.

It is hoped, by Bitcoin followers, that an ETF will open up a whole new level of investors who have been waiting on the sidelines to pump money into the digital currency. However, to date, the SEC has either rejected or delayed ETF applications for Bitcoin. The concern is understandably over the volatile nature of the currency and how to best protect investors from this. There are still ETF proposals in the pipeline but it does beg the question as to what Bitcoin now is.

The attraction of Bitcoin was originally based on the notion of a decentralized currency, not controlled by government or central banks.

If Bitcoin becomes part of everyday, mainstream investing, then it will obviously have to succumb to the inevitable regulation that comes with it. Does this then destroy the whole philosophy of Bitcoin as being out of government control? Now that price is faltering, it seems that amongst Bitcoin investors at least, they don’t worry about the regulatory affects if that means price will rise.

Should I invest in Bitcoin?

The answer as to whether or not Bitcoin is a good investment is the same answer and disclaimer that financial companies give you when looking to buy any other currency, stock, fund or whatever the investment market is selling - Prices can go down as well as up and past performance is not indicative of future price action.

The last part of that disclaimer statement is particularly relevant in the case of Bitcoin and other cryptocurrency. As we discussed earlier in this article, investing in Bitcoin has been a wild ride with huge swings in both directions. Anyone looking to put their hard earned money into such things should be prepared to lose it.

It is still very unclear as to what will happen to Bitcoin. It's hard to picture a situation where governments and central banks will allow an unregulated entity like Bitcoin to flourish as a currency adopted by the masses. Regulation of some kind seems inevitable. Acceptance of Bitcoin by retailers is slow mainly due to the price volatility in exchanging it into fiat money. Although this may change in the future, for now, Bitcoin is seemingly just being used a highly speculative vehicle.