Why would you invest your money in Bitcoin? This is a question that a lot of investors have right now. With Bitcoin almost trading at its all time high, why would you consider putting your hard-earned cash into it? In this article, I’m going to try to answer those questions for you. If you like to learn about personal finance, we have a whole section where we post articles about personal finance, stock market, and Bitcoin.
What is Bitcoin?
In a very simple non- technical term, you can think of Bitcoin as a digital asset just like a physical asset gold. But the only difference is that you hold these bitcoins in your digital wallet as opposed to a bank locker or at your home.
You can use Bitcoin to transfer, pay, and divide money however you want since every transaction is recorded in a ledger called blockchain. In 2021, Bitcoin will be used/traded more than ever as a digital form of currency.
You might ask, if there is a tangible asset like gold which is is very stable and has been in use since god’s time, why is there a need of Digital currency such as Bitcoin and Ethereum?
What makes Bitcoin so valuable? The short answer is that there are only twenty million Bitcoins that can be mined and most of it is already mined. As we mine more and more Bitcoin, it will be harder and harder to mine the rest of them. It is said that the last Bitcoin will be mined in the year of 2100. This limited supply and its decentralized nature makes Bitcoin valueable asset in the eyes of people who think dollar is no longer the currency of the future.
COVID-19 and the Economy
COVID-19 aka a disease that caused Pandemic in this world after a century brought the US Economy down to its knees. It is estimated that the US GDP lost about 16 trillion dollars in the year of 2020. The employment figures are rising and there is no sign of recovery anytime soon. Federal government is trying to save economy by providing assistive stimulus packages for general people and protection plans for businesses that are hurt the most, but it’s not enough. The impact of COVID-19 to the economy of the world is here to stay for a long time. This can have very negative impact on the strength of dollar and other currencies; therefore, I think people will try to convert their fiat currency to crypto so that they would not lose value over a long term.
A lot of companies like PayPal and Square started allowing people to buy and sell crypto but there are a whole bunch of companies who started to provide shopping and card reward points to people in crypto. There was even a rumor that a NFL player was getting paid in Cryptocurrency. There are Visa cards out there that pay you points in crypto.
Micro strategy and few other big companies have openly said that they have been buying Bitcoin to save their balance sheets from shrinking because the Fed has been printing money like there is no tomorrow. This triggered further Bitcoin buying by other people and hedge funds. There are new Bitcoin etfs forming and more and more people are optimistic about the future of Bitcoin. This caused the Bitcoin to go up massively in the last couple of months. Hard to believe that at some point in 2021, Bitcoin was trading below $4,000, and now it’s trading near $40,000.
Investment Strategy for Bitcoin
If you would like to own Bitcoin, you should put no more than 5% of your portfolio into this asset class, and the reason why I say that is because Bitcoin is still in its early state despite the fact that it is over 12 years old. Risking 5% of your portfolio is generally not going to impact your finances in an event of a total loss. If it Bitcoin were to go up, you’d still enjoy the appreciation and gains.
Beware of Price Manipulation and Volatility
Is there a price manipulation in Bitcoin? Yes, of course. Any assists trading like stocks are susceptible for price manipulation and pump and dump scheme. Since Bitcoin is not regulated by laws and government body, it is likely that big whales come in to make money and wash everyone else by taking their money out in the end. This scheme is called pump and dump. This is why Bitcoin and other cryptos are so volatile unlike stocks. When you are buying Bitcoin, you must consider this fact about Bitcoin that it could drop big and could run up big as well. In 2017, when it dropped big, a lot of late buyers lost their arm and a leg trying to buy Bitcoin at the peak of almost 20k. However, a lot of people are saying that this time it is different than in 2017.
Rough Road Ahead
The other standards such as dollar and gold have been out there since the beginning of time. In addition, there will be a lot of regulatory hurdles that Bitcoin has to go through in the coming years and months. Who know what’s going to happen when all of a sudden governments around the world start to realize that this is an existential threat to their traditional currently model.
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Here are some ways to trade Bitcoin and other Cryptos: