Are you thinking of buying Bitcoin? Or do you already own some but you’re wondering if you should sell it? Bitcoin is a hot topic right now, and if you are thinking of investing then it’s important to understand the facts. We’re going to look at 5 reasons why investors are in love with Bitcoin as an investment and the top 10 reasons why Bitcoin might be a terrible investment.
What is Bitcoin?
Bitcoin is a digital currency that was created in 2009. It uses peer-to-peer technology to facilitate instant payments which means that you can buy, sell and exchange directly, without an intermediary like a bank. It was the first cryptocurrency created and it has continued to gain popularity.
5 reasons why investors are in love with Bitcoin as an investment
1) Bitcoin’s supply is limited.
There’s no more than 21 million bitcoins that will ever be minted. Its value cannot be diluted by the government printing money. For this reason, Bitcoin enthusiasts believe it’s a good hedge against inflation.
2) Bitcoin is slowly becoming accepted as a means of currency.
It is now the largest and most well-known digital currency. You can pay for Xbox live, groceries at Wholefoods, supplies at Home Depot and more. At least one-third of small to medium-sized businesses in the United States now accept Bitcoin as payment, according to a survey conducted by Hartford Steam Boiler. Some companies will also offer to pay your salary in Bitcoin which may be enticing if you are thinking of breaking into cryptocurrency investing. El Salvador is also the first country that has officially adopted Bitcoin as legal tender.
3) Blockchain technology is going to be revolutionary.
Blockchain is a technology that is designed to make transactions more secure by recording the information over a network of computers. This will make it harder for people to hack or cheat the system. It is also highly decentralized which is a great hedge against government control. Blockchain is the tech behind Bitcoin.
4) Big box wealth management firms are starting to include Bitcoin in client portfolios.
Morgan Stanley was the first big U.S. bank to include bitcoin in their client portfolios. Goldman Sachs soon followed in 2021. We may see a huge bump in prices in the future if these wealth advisors buy more Bitcoin for their clients. Keep in mind, they manage trillions of dollars in assets.
5) Bitcoin is now easier to buy.
In the past, you needed to send money to an exchange like Kraken or Coinbase, or use a Wallet, which can be a hassle. Now you can buy bitcoin using PayPal, Venmo, or Robinhood. The first Bitcoin ETF was launched in October 2021. This means that Bitcoin is now available through most online brokers who offer traditional securities like stocks and bonds.
10 reasons to stay away from Bitcoin as an investment
1) The price is too volatile to be used as a global currency.
Bitcoin is extremely volatile. This is mainly due to the lack of regulation, the sentiment factor, the limited supply, and speculation. On average, Bitcoin swings by more than 3% every day. If you get paid $10,000 a month, you want your $10,000 to still be there by the time your mortgage payments kick in or when you pay for a trip to France with your special someone. You don’t want it to suddenly drop to $6,000 by the time you get to your checking account. Extreme volatility may be appealing to some Bitcoin investors but it is too volatile to be used as a global currency.
2) What if Bitcoin prices stabilize, can it become the digital currency of the world?
Central banks around the world are creating their own digital currencies. This will compete heavily against Bitcoin and other cryptocurrencies. The US has been studying the feasibility of a digital dollar for years. China is ahead of the pack and has started piloting a digital yuan that’s accessible in mobile apps. At the Beijing Winter Olympics, over $300,000 in transactions was made every day in digital yuan. Bitcoin is going up against these central bank heavyweights.
3) It’s not a scalable means of payment.
Another issue for Bitcoin is the issue of network scalability. The technology behind Bitcoin only allows up to 7 transactions per second. The Visa network can process up to 65,000 transactions per second. Bitcoin will suffer without the credibility that it will be able to handle a growing amount of transactions in the future.
4) Bitcoin enthusiasts claim it’s a good hedge against inflation. But is it really?
In May, June and July of 2021, inflation jumped to around 5%. During this time, Bitcoin prices actually dropped by >40%. Therefore, it wasn’t a very good hedge against inflation.
5) Bitcoin is also not a good hedge against stocks.When stocks tanked by about 30% in March 2020, bitcoin prices dropped by 50%. If you are looking for a hedge against inflation, you may want to look into I Bonds.
6) Bitcoin is not blockchain.
Blockchain technology is revolutionary and is reducing transaction costs and time to send money between countries. However, Bitcoin is not blockchain technology. It just uses that technology.
7) Reports of price manipulation.
A former crypto miner and investment analyst from Research Affiliates (global leader in asset allocation) wrote a scathing report in 2021, warning readers that the price of Bitcoin is “nearly certainly a bubble and likely manipulated.” The manipulation is likely happening through a stablecoin called Tether. You can exchange Bitcoin to Tether 1:1 supposedly anytime. Tether initially claimed that it’s 100% backed by USD but it was revealed later on that it was actually not true. Tether is currently being sued by investors who allege that Tether Limited is just minting the stablecoin Tether out of thin air, which they then use to buy Bitcoin, which artificially pushes up the price.
8) Bitcoin is vulnerable to hacking.
Crypto exchanges keep getting hacked. There were more than 20 hacks in 2021.
9) Vulnerable to government regulation.
Bitcoin transactions are hard to trace. That’s why money launderers and ransomware criminals like to use Bitcoin. Governments can choose to heavily regulate it or even ban it. China has banned Bitcoin and other crypto currency transactions entirely.
10) If you care about the environment, you may want to think twice about investing in Bitcoin.
Bitcoin mining emits 37 megatons of carbon dioxide each year, equivalent to that of New Zealand. This is certainly not very climate-friendly.
As a financial advisor, have I personally bought Bitcoin?
I have a pretty high risk tolerance. My investment portfolio is in 100% stocks. However, I have not invested in Bitcoin or any other cryptocurrency. The reason is that Bitcoin has no intrinsic value. It doesn’t generate money like a rental property, or a business. Basically, all you’re hoping for is for the next guy to pay more. That is not a game I want to play.
Should I invest in Bitcoin?
You’ve heard the facts. I’ll let you decide if you want to invest in Bitcoin. At District Capital Management, we work with a variety of clients with different investment portfolios. If you are interested in a comprehensive financial plan with personal investment recommendations, schedule a free discovery call with one of our financial advisors today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.