Due to Bitcoin’s record prices, many investors think they are sleeping rich—nevertheless, some reasons to remain suspicious of the success.
When it was recently announced that car manufacturer Tesla had bought bitcoins for 1.5 billion dollars, the price of the virtual currency reached new record highs, even as high as 60,000 dollars. Tesla is certainly not the first company to invest in virtual currency.
An investment by Elon Musk’s company – the second richest man in the world – gives bitcoin extra impetus as an investment. But whether such an investment is immediately interesting for you as a small investor? There are comments to be made on this.
1. The course jumps up and down
The price of bitcoin is volatile: large increases are followed by decreases at least as large. After the summer, the bitcoin price fluctuated around 10,000 dollars. Since then, the rate has risen to $ 60,000. But that tide can turn quickly.
At the end of 2017, the exchange rate was close to $ 20,000, but the following year it dropped to about $ 4,000. That is a loss of 80 percent… In practice, few investors can handle such fluctuations well.
At the moment, it is almost impossible to predict in which direction the bitcoin price will evolve. By the way, that is not easy for ‘ordinary’ shares, but at least there are objective figures available. Consider, for example, figures about turnover, profit, cash flow, price-earnings ratio; that can tell a lot about the valuation of a particular share. With bitcoin, it is much more difficult to determine the intrinsic value – if there is one – and what that means for further price development.
The predictions, therefore, vary widely. The critics see bitcoin as a big bubble that will burst sooner or later. The believers think prices will climb to hundreds of thousands of dollars. You understand why you, as an investor, do not have so much guidance.
3. Not yet an established means of payment
Proponents of bitcoin like to argue that virtual currency will/can develop into a future payment method. And if that’s right, it is certainly a good reason to invest in it. Again, we find both skeptics and convinced here.
Most experts do not (yet) assume that bitcoin will replace money as we know it today. The reason for that is time. Every transaction via bitcoin is verified by the network of other users (blockchain), so every transaction also takes some time. As a common means of payment (for example, at the grocery), this would be rather cumbersome.
4. Energy consuming
Bitcoin is further criticized because the underlying system is so energy-consuming. Many heavy computers are used to check Bitcoin transactions. Now that sustainability is becoming an increasingly important priority. This can deter large companies and individuals from investing in bitcoins.
5. Tool for speculatiing
Proponents can put forward a counter-argument for any argument against bitcoin. The truth is that no one can predict the price trend or rule out the possibility that it will be a bubble that will explode sooner or later. This makes bitcoin more a tool for speculating than for sustainably investing your savings.
If you still want to take risks, it is better to invest regularly in a diversified portfolio of investment funds. The potential returns may be less impressive, but the risk is more limited (but not non-existent either). For most investors, the volatility of a typical fund (whose price is also going up and down) is difficult enough to deal with. With bitcoin, the jumps are many times bigger.