Have you been wondering what exactly is bitcoin, and should I be investing in it? You’re not alone! In March 2018, John Oliver on HBO’s Last Week Tonight described bitcoin as, “Everything you don’t understand about money combined with everything you don’t understand about computers.”
The Role of Bitcoin in Your Portfolio
Bitcoin and related cryptocurrencies (now numbering in the thousands) are the subject of much debate and fascination. Given bitcoin’s dramatic price changes, it is not surprising that many are speculating about its possible role in a portfolio.
In its relatively short existence, bitcoin has proved extraordinarily volatile, sometimes gaining or losing more than 40% in price in a month or two. Any asset subject to such sharp swings may be alluring for short-term traders but of limited value either as a reliable medium of exchange (to replace cash) or as a risk-reducing or inflation-hedging asset in a diversified portfolio (to replace bonds).
Are There Benefits To Buying Bitcoin?
Assessing the merits of bitcoin as an investment can be problematic. The owner of stocks, bonds, or real estate generally expects to receive future income from dividends, interest, or rent. In contrast, holding bitcoin is similar to holding gold as an investment. Even if bitcoin or gold are held for decades, the owner may never receive more bitcoin or gold. Unlike stocks and bonds, it is not clear that bitcoin offers investors positive expected returns, since it doesn’t pay dividends, interest, or rent.
The Future of Bitcoin and Other Cryptocurrencies
While we believe cryptocurrencies such as bitcoin are here to stay, no one knows which cryptocurrencies will survive in the long run, nor how government regulation may ultimately affect their value and usage. This new wave of innovation is reminiscent of the internet boom, where it truly changed our way of doing business over time, but the vast majority of early internet-based companies failed to survive the transition.
Furthermore, since bitcoin is not backed by any issuing authority, the value of an investor’s bitcoin can be lost forever simply by forgetting the password to the investor’s account. Some sources estimate that 20% of outstanding bitcoin represents stranded assets unavailable to their rightful owners.
Should I Buy Bitcoin in 2021?
The financial services industry has a long tradition of innovation, and cryptocurrency and the technology surrounding it may someday prove to be a historic breakthrough. For those who enjoy the thrill of speculation, trading bitcoin may hold appeal. But those in search of a sound investment should carefully consider the risks involved before joining the excitement.