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Is Bitcoin A Good Investment?


1 December 2022

Bitcoin has grabbed the attention of the world over the last decade, as it could represent a new form of decentralized money. The ability to have a trustless payment system without a third party intermediary has many people betting on its future being bright. That being said, it is worth noting that Bitcoin, and cryptocurrency in general, tends to be very volatile. With this, you can ask the question “Is Bitcoin a good investment?” As with anything else, there is much more to learn than first meets the eye.

Bitcoin Investing: What Is It?

Even though Bitcoin is vastly different from most other traditional financial assets, it does have quite a bit of similarity when it comes to investment. It is different yet similar to investing in stocks, bonds, currencies, and more, but it is a digital asset instead of a physical one. Gold or shares of a company exist physically, while Bitcoin acts as a digital commodity or collectible. The first-ever recorded Bitcoin price was $0.003. Since then, Bitcoin has reached a price of $60,000 in 2021. 

Longer-term, Bitcoin has consistently risen in price given enough time. Anybody who has bought Bitcoin since it was past has realized that they have realized a gain if they held on to the asset. If that pattern continues, Bitcoin could reach as high as $500,000.

Is Bitcoin a Good Investment? A Look Back At Performance 

With such a substantial ROI in the past, investors will often wonder if Bitcoin is a good investment in the long term or if the best gains are in the past. 2020 was a very strong year for Bitcoin, as stimulus due to the pandemic had central-bank printing presses going full speed. Because of this, investors started to pile into Bitcoin as it has a limited supply. 

As there will only be 21 million BTC, it creates scarcity, especially in the face of massive US dollar printing. Those who feared inflation and had cash reserves that were losing value started buying assets, with some of that flowing into the cryptocurrency markets. This was the beginning of a significant uptrend. 

However, the market got far ahead of itself in 2021, breaking above the $60,000 level. At that point, the market has pulled back, and as we have seen in 2022, Bitcoin has fallen quite drastically. We have seen massive selloffs previously, and Bitcoin has always managed to turn itself around. Bitcoin is a bet on crypto being a disruptive technology. With uncertainty, there is opportunity. This is a market that has been overbought, followed by oversold. If the Federal Reserve finds itself in a situation where it has to pivot its monetary policy due to a recession, that could be the catalyst for the next great bull run in Bitcoin.

Investing in Bitcoin in 2022: Is It a Good Idea?

A return on Investment of 100 million% over the last decade suggests that investing in Bitcoin is almost always a good idea. Timing when you will buy or sell is the tricky part of maximizing returns and profiting from the market and its high volatility.  As 2022 has shown, Bitcoin most certainly can fall quite drastically. However, history has shown us that every time the market drops like this, it is only a matter of time before it picks itself back up. The problems in the crypto world are just as much external as they are internal at the moment, and if crypto is something that you think will survive, Bitcoin will almost certainly remain at the forefront. With Bitcoin, it’s a bit of a binary question. The question is, “Will crypto stick around?” 

Longer-term holders, also known as HODLers, may look at this through the prism of a buying opportunity, because so much negativity has found its way into the crypto markets. Various scandals have rocked the space, driving down trust massively. Looking forward, it’s very likely that 2022 will be thought of as either the year that crypto finally sorted itself out, or the year that proved fatal. Keep in mind that investing in Bitcoin is a bet that adoption will continue to expand on the network, and that crypto on the whole will find a place in every day transactions.

Bitcoin Fundamental Analysis

Bitcoin and other cryptocurrencies have different fundamental analysis metrics than other assets. One of the most important ones is the network’s hash rate or amount of activity. After all, it stands to reason that the more work being done on a network, the more demand there is for the coin. Another type of fundamental analysis will look at how much BTC is kept on crypto exchanges and cryptocurrency trading platforms. As a general rule, most analysts believe that the less Bitcoin is held in these places, the better because it means that people are not looking to sell their holdings. Despite volatility and price, this hash rate chart shows how steady the growth of users on the Bitcoin platform has been over the last three years.

Unfortunately, with the scandal that has occurred at FTX, the fundamental analysis of Bitcoin being kept on an exchange may change, as trust in exchanges may erode. Keep in mind that those who are truly willing to hang on to Bitcoin will more often than not store it in a cold wallet. That trend is expected to continue going forward.

Bitcoin Technical Analysis

Technical analysis can be somewhat subjective, so you should keep that in mind when looking at charts. However, it gives you an idea of how the market is “leaning,” In the middle of 2022, Bitcoin has fallen somewhat hard. However, the $20,000 region and the $12,000 region both suggest that there could be massive amounts of buying in that area, indicating that the downtrend is just about exhausted. In other words, it could open up an excellent long-term buying opportunity.

It is probably worth noting that a lot of retail traders rely on technical analysis, and Bitcoin is still very much a retail trading environment. Because of this, technical analysis does tend to perform very well in the cryptocurrency markets, and Bitcoin as well.

Bitcoin Sentiment Analysis

Doing Bitcoin sentiment analysis involves looking at several things at once. You can search the term “buy crypto” and see how much interest there is. Ironically, the more activity you see, the closer you will probably be to the top of the price. In mid-2022, sentiment dropped pretty low from this metric. That is a good thing for the cycle, as it suggests many of the “weak hands” have been flushed out. You can also search to find out what some industry leaders think. Paul Tudor Jones, one of the most respected billionaire hedge fund managers in the world, believes that Bitcoin will be the fastest racehorse in the race against inflation, comparing it to gold in the 1970s. 

However, as inflation became very aggressive in 2022, it has become apparent that at least in its current environment, Bitcoin does not hold up well against inflation, mainly due to central bank interest rates rising. Most money managers and large fund managers prefer to take less risk in this environment. It has become increasingly obvious that Bitcoin still remains far out on the risk spectrum. The main killer of Bitcoin price has been the quantitative tightening by the Federal Reserve.

As only 21 million BTC will ever exist, it does bring in a certain amount of scarcity, and therefore there will always be a certain amount of demand. You can also look to the US Dollar Index as a form of sentiment analysis because, as a general rule, people buy more US dollars in times of anxiety. In times of stress, they do not buy assets out on the risk spectrum like cryptocurrency. Another market that you can use to extrapolate sentiment is the stock market. The higher it goes, the more likely we will see “hot money” flowing into crypto.

Expert Expectations and Bitcoin Price Predictions

Keep in mind that nobody knows the future. However, some experts have publicly suggested what they believe the future pricing of Bitcoin will be. While you cannot guarantee that any of these predictions will come true, it gives insight into how some experts believe the market will play out. Venture capital investor Tim Draper has recently forecasted that Bitcoin will hit a price of $250,000 in the next two years. However, in 2022 the Federal Reserve has pivoted to a very hawkish stance, and he has rolled back some of that bullishness. He has recently suggested that Bitcoin could be choppy with a slightly bullish attitude over the next 12 to 24 months. 

Edward Moya, a senior market analyst at Oanda, has suggested that some of the selling pressure in 2022 is abating, but the more substantial buyers may not show up until the end of the year. He believes that “Crypto is not going away, and some investors are starting to believe that further downside might be limited.” This echoes the same sentiment seen during the last “crypto winter.” Like many other experts, he believes that Bitcoin will break the $100,000 level in the next bull run. 

Nigel Green, the chief executive of financial advisory group deVere, has recently stated that Bitcoin will bounce when the stock market does and that the worst of the selling is over. He believes that the bottoming process may be sluggish but that eventually, new highs will be hit, perhaps sometime during 2023. In other words, Bitcoin might be “on-sale” during 2022’s drop. A lot of what happens next with Bitcoin will come down to whether or not central banks start to loosen monetary policy again. For quite some time, especially during the covid pandemic, loose monetary policy had people looking to speculate on “hot assets.”

There are multiple questions to ask of Bitcoin, especially whether or not it is going to be used for money. Is it a value at this point, possibly even a good buy? These are all questions that should see answers in the near future. One of the biggest concerns about Bitcoin is going to be an investment for the future, or if it is going to be a passing fad. The biggest problem Bitcoin has is also the thing that makes it so attractive to trade. Volatility can lead to big gains, but Bitcoin trading has to be more than just speculation. Stability in price fluctuations are paramount if it is ever to be used on a daily basis.

Ways To Invest In Bitcoin

Investing in Bitcoin in the early years was challenging. You had to mine Bitcoin or get it as a gift from someone else. Now it only takes a few clicks to invest in Bitcoins or buy Bitcoin online. Once you have obtained Bitcoin, you can decide on various investment methods. Some of the most common Bitcoin investment strategies are:

Buy and Hold

Buying and holding Bitcoin involves first purchasing Bitcoin on a spot exchange or other cryptocurrency trading platform and storing it in a wallet. The wallet can either be on an exchange or in cold storage for the long term. (Cold storage refers to wallets that are not connected to the Internet.). Although not as risky as many other forms of Bitcoin investment, it does involve risk. In 2019, Bitcoin rose from below $4000 to reach $14,000. The following year, it dropped back below the $4000 level. In 2021, Bitcoin broke the $60,000 barrier, but by June 2022, Bitcoin was trading just below the $20,000 level. In other words, it is an extraordinarily volatile asset, so it’s worth can change quite drastically if you simply hold onto it.

As the markets continue to evolve, the “buy-and-hold” strategy may become much more palatable once the volatility disappears. If Bitcoin can become a more universally accepted trading instrument, it should bring in more institutional money. In that scenario, Bitcoin is more likely to act like the stock market than anything else. The correlation between the NASDAQ 100 and Bitcoin during 2022 has been quite telling. Is this going to be the future correlation we all watch? Only time will tell.

Trading

Instead of buying and holding Bitcoin, investors can also trade their assets at each high or low price. There are two main ways of doing this, spot trading or derivatives trading. Spot trading involves buying Bitcoin and trying to sell it at higher prices. This is how most people think of the stock market as an example. You buy something, hoping to appreciate in value. You can jump out of the market and sit in cash if the market crashes. If a trader buys 1 Bitcoin under $4000 and then sells it at the high in 2019, near $14,000, they gain roughly $10,000. That $14,000 that the trader now has could have been used to buy Bitcoin when it fell below $4000 yet again and still left $10,000 sitting in the account. 

However, when trading a derivative contract, the situation is quite different. To begin with, traders can use leverage to control more of an asset. 100 times leverage means that your gains could be 100 times what had been possible in the spot account. Keep in mind that it works in both directions, meaning that your losses can pile up, but simple money management is used to keep that from happening. 

In the previous example of Bitcoin rising from just below $4000 and reaching $14,000 later that year, a trader could’ve made $10,000 on the way up and then $10,000 on the way back down if they shorted it. That would be a $20,000 gain. However, with 100 times leverage, that $20,000 gain becomes closer to a $2 million profit.Learn more

Pros and Cons of Bitcoin

While Bitcoin has been a wise investment so far, there are several pros and cons that you should keep in mind when considering investing in Bitcoin.

Pros

Cons

How Much To Invest In Bitcoin?

How much to invest in Bitcoin will ultimately be up to you and your comfort level. The most common advice people receive when investing in anything, let alone first starting to invest in Bitcoin, is never to invest more than you can comfortably afford to lose. In the future, Bitcoin could reach $500,000, or it could also go to zero. There is no way to know what will happen, but with such new technology comes a binary outcome. In other words, it will either be adopted or it will not. If it is adopted, the scarcity of Bitcoin could make it one of the hottest assets in the world. 

It could be worthwhile to start small with just tiny Bitcoin increments before jumping in with a more considerable investment. Bitcoin can be purchased in any denomination, with the smallest amount being 0.00000001 BTC, also known as a “Satoshi.”

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