Bitcoin this year is up 72% and in the last 15 months, it is up over 330%. Should you invest in this cryptocurrency?

What is It?

Most people buying bitcoin or a proxy for it could not give you a good definition of what they’re buying, and I understand because digital currency is extremely complicated.

What I hear from most of them is that it is digital currency that is still relatively new and may become a much more accepted form of payment with a limited supply which makes it like gold, something which holds its value long term, and since almost 90% of bitcoin has already been produced, it can increase in price exponentially as acceptance and demand increases.

Volatility in the Extreme

Most people are aware that the price has gone up from less than $1 in 2009 to $73,000 today and that there have been three times in that span when the price has crashed. In 2017-2019 it went from $19,000 to $3,000, in 2001 it lost 50% in a few months and in 2022 it went from roughly $67,000 to $16,500 and now quadrupled in 15 months. Here’s the chart.

Is Bitcoin Really a Currency?

Technically yes, practically not so much. A currency is defined as a medium of exchange. Do people buy and sell things with digital currency? Well, a very few places do, but one of the things people want most from a currency is stability. They want to trust the value of what they are getting and the value of bitcoin changes dramatically in a very short time. So no, it is rare for people or companies to accept bitcoin as payment, though some do.

In fact, the ones who most use digital currencies as currency are criminals trying to hide transactions. In China, billions were found to have been spent by gangs using digital currency and this is one of the main reasons why governments are concerned about its use.

Will it Become a Generally Accepted Currency?

That’s hard to say. Governments would rather create their own digital currency that they can control. But governments realize that independent digital currencies have become a big deal and are not squashing them but instead are increasingly regulating them.

I don’t think bitcoin and other digital currencies will become actually currency to most people until the price is very stable and that does not at all appear to be in the near future, if ever. In fact, the appeal of bitcoin to most people is that it is not stable but skyrocketing in price. They see it as a chance to make a lot of money in a very short time, and if they just got in lately or bought earlier and held on, they have made a lot of money. The question is whether bitcoin will keep going up or crash again.

Aside from the volatility, there are issues of crime, no government backing, no assets to back it up, the preference for governments to have their own digital currency, the tremendous environmental cos, and the extremely complicated nature that most people don’t understand. To explain the environmental cost, By some estimates, the Bitcoin network consumes as much energy as entire countries like Argentina and Norway, not to mention the mountains of electronic waste from specialized machines used for such mining operations that burn out rapidly (Source: Brookings). It is just unsustainable. Aside from those issues, what happens when there is no more bitcoin to mine, predicted to occur in 2140? That’s hard to say.

What is Causing Bitcoin to Go Up So Fast?

Two things are driving the price at the moment.

First, just the fact that it is going up so fast which attracts speculators. What is the difference between investing, speculating and gambling? If you look the terms up, speculating is investing with hope of making a profit and gambling is to take a risky action in the hope of a desired result. It’s really a spectrum. All three involve risk and on that spectrum I think bitcoin is closer to gambling than investing. The appeal is that unlike gambling on dice or cards where streaks are very short, the streak in bitcoin is months long and the loss if you’re wrong probably won’t be total.

The second driver of price is the much-increased ease of investing in bitcoin by buying an ETF (exchange-traded fund) through a broker. The appeal of that is hard to overstate, plus the approval of ETFs by the Securities and Exchange Commission seems to lend some validity to bitcoin as an actual investment. As people place orders for the ETFs, the funds must buy bitcoin, pushing the price up, and that I think as real staying power. That is an enormously important development and could push bitcoin up quite a bit more.

Will Bitcoin Crash Again?

The answer is yes. The reason is that exponential moves in price like bitcoin is experiencing now, almost always have large, sudden setbacks, and the size of those setbacks is generally proportional to the size of the move up in price. That should be magnified by the fact that there is no intrinsic value to bitcoin like there is with company stocks that have underlying business with assets, that is unless debts of a business outweigh its ability to continue or its market disappears. When bitcoin will crash again is probably most affected by the speed at which it moves higher in price. The greater the speed, the more likely the crash will be sooner.

The Verdict

I think bitcoin will go higher in the short run. I think it will also have some very large setbacks in price in the not-too-distant future. If you understand that you are basically gambling, then I think you can make some money on bitcoin. I wouldn’t mortgage your future on it, and I certainly would not suggest borrowing money to buy it. And I am skeptical about it becoming a commonly used medium of exchange and skeptical that it will be ever priced in the hundreds of thousands of dollars, so invest or gamble at your own risk and keep it a low allocation. That’s my take.