Unless you’ve been living under a rock, you’ve probably heard of bitcoin and you’ve probably pondered even ever so briefly at one point or another, “Should I buy some bitcoin?” I personally think it might at least be worth another consideration and I’ll give you 5 reasons why, but before I give you my reasons, let’s do a brief primer, on Bitcoin.
What is Bitcoin?
I’m not uber technical, but basically, Bitcoin is a decentralized digital currency (specifically a cryptocurrency) that was created back in 2009. It uses blockchain technology to record all transactions. You can buy and sell bitcoin across a bunch of exchanges, some notable ones are Coinbase (If you use Coinbase, USE COINBASE PRO for less commissions) and Binance. Bitcoin is often referred to as “Digital Gold” since similar to gold, there is no central banking system that controls it.
It has had a volatile history since its inception and gained a lot of notoriety and mainstream attention back in 2017 when the price per bitcoin skyrocketed to $19,000 or so by the end of the year. It then proceeded to crash in January 2018 and traded within a fairly tight range for a few years until 2020. It then proceeded to make a huge comeback, finishing the year around $29,000 a bitcoin.
With that said, here are a few reasons why I think it might be worth considering buying some bitcoin.
1. Bitcoin is attracting institutional investors AKA big money
As noted above, the crash of 2018 happened largely due to retail investor euphoria that quickly dissipated as soon as the momentum stopped. However, in the few years since, a lot has changed. Specifically, Bitcoin is starting to attract some big named investors and institutional investors. People like Elon Musk and Chamath Palihapitiya are investing in Bitcoin. Companies like Square, MicroStrategy, and Tesla are buying Bitcoin. Just the other day, the biggest asset manager in the world, BlackRock (with $8.67 T under management) said that they are “dabbling in Bitcoin!” When big companies buy Bitcoin, they may attract other big companies to jump in which then provides a floor for the price of each Bitcoin. It’s hard to say what the floor is, but it seems that Bitcoin has basically been going up steadily since the start of 2020 with only a few minor blips here and there.
What’s important about Tesla’s purchase of $1.5 billion of Bitcoin and the fact that they are also taking it as a form of payment is that given the size and influence of Tesla, other large corporations may eventually do the same. Remember, Tesla is the FIRST S&P 500 company to do this and won’t be the last.
This is what Tesla wrote in their SEC filing about their purchase of Bitcoin and what it was for: “more flexibility to further diversify and maximize returns on our cash.” I wouldn’t be surprised if by the end of the year, a few more S&P 500 companies began purchasing Bitcoin as a way to diversify their cash.
2. The US is Printing Money and there are Fears of Inflation
The pandemic forced the United States to inject a bunch of stimulus into the US economy in an effort to stimulate the economy and the Fed is buying a shitload of treasuries every month to keep rates low and to prop up the bond market which is increasing the money supply like crazy. The US money supply has increased 40% since April 2020 through January 2021. That’s nuts since the US money supply has grown pretty steadily prior to April 2020:
There are definitely people worried about inflation given how much money we’re printing and this is why the price of gold spiked significantly in 2020. Since Bitcoin is considered “digital gold,” many investors are treating Bitcoin as another “inflation hedge.”
What’s important to note is that who knows if all this money printing will actually increase inflation. We haven’t really seen much “inflation” in the past 10 years despite some significant quantitative easing during the great financial crisis, though I doubt that the basket of goods that they’re measuring yearly includes hospital bills and college tuition which clearly have skyrocketed over the years.
There’s an interesting podcast on NPR about “Modern Monetary Theory” that talks about potentially why there hasn’t been a huge amount of inflation yet.
3. Bitcoin has Significant Upside (and Downside) Value
A big reason why people are interested in Bitcoin is that the price per Bitcoin has gone up dramatically which has led to a lot of wealth generation for a number of individuals who got in early. As someone interested in FIRE, upside is always appealing while understanding the downside and for me the upside is more appealing despite the downside risks.
Here’s the price per Bitcoin at the end of each year and its respective return since 2015:
Bitcoin at the time of this article is hovering around $50k per coin which is up another 60% YTD!
Granted, we’re right now in the midst of a huge rally in Bitcoin but history shows that Bitcoin can just as easily plummet after a meteoric rise. See: November 2011, April 2013, early 2015, and January 2017.
No one wants to be a bag holder when the bubble pops, but the big question is, are we in a bubble or is this rally going to keep going? Given the amount of institutional investment, it’s hard to see Bitcoin ever going back to $5,000, but Bitcoin seeing $30k again is always possible. Given this, any allocation to Bitcoin should be treated as money that you won’t need for a long time (or maybe never if it’ll make you feel better).
Speaking of buy & hold, I actually bought a $550 graphics card back in 2018 to mine Bitcoin and this was after the crash in January 2018. Bitcoin was trading around $11,500/coin back then. I mined for about 6 months or so and ended up mining around 0.05 bitcoin before calling it since the rates were terrible and it was definitely not covering the incremental electricity that it was using. By the time I stopped mining, Bitcoin was trading at $6,500/coin and I was underwater about $200 on my initial purchase of the graphics card and that wasn’t factoring in electricity costs.
2.5 years later, it looks like that 0.05 bitcoin I mined is worth around $2,500. So, it took a couple of years, but I was able to get a solid ROI on my graphics card investment and then some. Not to mention, I did use that graphics card for video games and what not, so I guess all wasn’t lost when Bitcoin crashed to $6,000 back in late 2018.
Quick disclosure, I bought a lot of Bitcoin on February 15, 2021 and made my first Bitcoin purchase back in July 2017.
Why You Shouldn’t Invest in Bitcoin
I’ve given you a lot of reasons why you should buy Bitcoin but there’s also reasons why you may not want to buy Bitcoin.
First, it’s an incredibly speculative investment. There is no actual “value” to Bitcoin besides what the market has determined and unfortunately for Bitcoin, that value is incredibly volatile.
Second, there have been a number of hacks or scams related to Bitcoin in the past and who’s to say that there won’t be more. It’s important to note that when you buy Bitcoin on a platform, you are trusting that platform to hold onto your Bitcoin. If you really want security on your Bitcoin, you should transfer it to a private hardware wallet such as a Trezor.
Finally, if you’re incredibly risk averse and may make emotional decisions when bad things happen to your investments, this might not be the ideal investment. As noted above, the price of Bitcoin is incredibly volatile and it’s perfectly within the realm of possibility that Bitcoin could tank 10%, 20%, 50% over a period of time. If you’re one to set tight stop losses or not interested in holding onto your investment through the ups and downs, then Bitcoin might not be something you’d invest your hard earned dollars in.
How Much Bitcoin Should You Buy?
Disclaimer: Again, please do your own research and think about your sensitivity to risk and your personal financial situation since this article is purely informational at best and should not be construed as financial advice.
If you’re ready to invest and understand the risks, I would suggest starting small. Perhaps you buy just a few dollars worth to get a feel of the volatility of Bitcoin. For those who are wanting to take a deeper plunge, most people I know that have invested in Bitcoin allocated a small percentage of their overall net worth (i.e. 1-5%). I personally have invested about 3% of my net worth into Bitcoin and other cryptocurrencies but a lot of that is from my earlier investments back in 2017. As noted, I did make a purchase on February 15, 2021.
What about the other Cryptocurrencies?
Yes, there’s a lot of other cryptocurrencies out there, you’ve probably heard of Dogecoin and Ethereum and maybe even Stellar, but for someone just starting out, let’s start with baby steps. The two big cryptocurrencies out there are Bitcoin ($BTC) and Ethereum ($ETH), you can see their ranking by Market Cap here.
I personally own a few cryptocurrencies, Bitcoin is my biggest allocation and then Ethereum and Stellar are secondary positions that are much smaller.