The virtual currency market, known as the cryptocurrency market, can be challenging to navigate if you’re unfamiliar with this type of investing space.
In the late 1980s, the idea for cryptocurrency was born from the desire to create a currency that did not need to be regulated by a centralized financial institution, such as a bank.
However, the first cryptocurrency experiments did not begin until the mid-90s, culminating in the successful creation of bitcoin in 2008 and its launch in 2009.
Since then, the accelerated growth of digital currencies has taken off, and according to Vantage Market Research data, the Global Cryptocurrency Market will surpass $23 million USD by 2028.
So what does this mean for you as an investor? Is cryptocurrency worth investing in? Is bitcoin a good investment?
Let’s take a closer look at the history behind bitcoin, how it’s created, the total value of bitcoin, investing in bitcoin, and its future in the crypto market.
What is Bitcoin?
Bitcoin, or BTC for short, is the most widely traded and popular cryptocurrency in the world.
As I mentioned, it was created in 2008 using blockchain technology as a way to disrupt traditional global payment networks. The idea was to allow for peer-to-peer currency exchanges that did not require oversight by a third-party financial institution.
How are Bitcoins Made?
Bitcoins are created through a system called “mining,” which is a complex process where hardware is used to solve an intricate math calculation. The first computer to decode and find the solution to the problem receives a reward as a block of bitcoins. Then, the process indefinitely repeats itself.
The mining process is integral to the success of blockchain technology, the foundation upon which Bitcoin was built. The bitcoin blockchain is a series of blocks that contain transactions made on the network. Computers around the world contain a copy of each block, forming the network that is used to maintain the security and legitimacy of the blockchain.
This process ensures the system continues to work effectively.
How Do You Invest in Bitcoin?
Because it uses an entirely separate system, the process of investing in cryptocurrency varies from traditional methods of investing.
To know how to invest in bitcoin, you must understand how the blockchain system works. Essentially, a blockchain keeps a record of transactions that are managed by a decentralized network of computers. It is the backbone of all cryptocurrency exchanges.
Once you understand the foundation upon which Bitcoin was built, you still need background knowledge on the process for how to invest in bitcoin. There are a variety of steps you must take before getting started.
- The first is to open an account with a cryptocurrency exchange, such as Coinbase, which is one of the largest and most well-known exchanges in the U.S.
- Then, once your account is created, you’ll be asked to connect your bank account and deposit funds into your exchange wallet.
- You’ll then use these funds to buy bitcoins and purchase a wallet (if you like).
- From here, you can trade currencies or other cryptos for bitcoins with different users.
While this method seems simplistic and convenient, it does beg us to ask:
Is bitcoin a good investment?
Truthfully, if you want to invest confidently, being active in the stock market is a better option. There are numerous risks involved with trading within the crypto market, which are not limited to large price fluctuations and increased volatility…but more on that later.
How Much Is Bitcoin Worth?
The total value of bitcoin will vary and fluctuate based on movement within the crypto market.
However, as of March 11, 2022, the bitcoin market value accounted for about $750 billion of the $2 trillion in the virtual currency market.
Is Bitcoin a Good Investment?
So, based on what you’ve learned so far, should you invest in bitcoin?
If you’re a Ruler and practice the principles of stock market investing, I would caution you to refrain from investing in the crypto market.
This type of investing goes against the four Ms for successful investing. When I say four Ms, I’m talking about meaning, moat, management, and margin of safety.
Here’s how bitcoin violates each of these principles:
- Finding the right investment for you should always begin with meaning. In other words, you need to become an expert on your investment option before making the decision to invest. There is still much to learn about how Bitcoin works and its viability in the future, making it a riskier choice than other investment options.
- A moat is known as a competitive advantage that a company has to protect it from others and increase the odds of investment success. The moat is nonexistent when managing cryptocurrencies since each person is responsible for managing their money. Essentially, they must single-handedly protect their finances without much guidance or support from other entities.
- Management is the third piece of this model. Since cryptocurrencies are not managed by any kind of financial institution, it’s trickier to assess the probability of their continued success.
- Lastly, the margin of safety describes the difference between the amount of profitability on an investment and its break-even point. It stresses the idea of buying things when they are on sale and searching for opportunities to pay less for something that might have a higher value. Investing in cryptocurrency means you’re investing in volatility. Fluctuations are likely, but predicting the near or long-term direction of bitcoin is impossible.
In addition, technological drawbacks make investing in cryptocurrency more complex. For example, it is difficult to scale public blockchain. The bitcoin blockchain is currently limited to about seven transactions per second in comparison to much larger networks which can process over 1,000 transactions in the same amount of time.
Plus, as more users become active on the network, more computing power is needed to produce similar results. The need for more power will increase the building costs of certain hardware and require more regulatory figures to be involved. This poses an issue because it limits the decentralized nature of the technology, which is the reason it was originally developed.
So, is bitcoin a good investment? As a Ruler, the short answer to your question is ‘no.’ If you’re still not convinced, though, keep reading to learn more about the risks associated with bitcoin vs. stocks.
What are the Risks of Bitcoin?
Investing in cryptocurrency comes with its fair share of risks. For Bitcoin, in particular, these include:
- Large price fluctuations – For example, Bitcoin rose more than 1300% in 2017 only to start 2018 by losing more than half of its value in the first month of the year.
- Greater volatility – As evidenced by the 2017 incident, volatility is a concern when it comes to investing in Bitcoin. Any changes in the bitcoin market value can occur rapidly and without warning. While the stock market can also be volatile, the crypto market has proven to be much more unpredictable.
- Uncertain future – There’s speculation around the future of Bitcoin and other cryptos. We do not know what is ahead and that can make potential investors skeptical and wary of putting their money into the virtual market.
- No intrinsic value – Bitcoin is not backed by a type of assets, such as gold or silver. Instead, its value is based on functional characteristics and is not set by a centralized institution.
- Susceptible to cyber attacks – Since transactions are made in the digital space, this makes them more prone to attacks from digital hackers. Hackers love to use bitcoin because of the anonymity since converting money to bitcoin, sending it, and receiving it does not require using a legal name or address.
- Environmental impacts – The bitcoin system isn’t very eco-conscious. Since Bitcoin is maintained through the process of mining, it requires that transactions be verified using the integrity of the blockchain. This process is known as “proof of work” and for it to be effective, it uses a high level of computing power to perform these capabilities. This leads to a high amount of energy consumption, which can be wasteful and damage the environment.
Still, despite these risks, many predict the worth of Bitcoin depends on what the future holds.
Will Bitcoin Progress into the Future?
The future of Bitcoin and other cryptocurrencies is very uncertain. However, as individuals learn more about cryptocurrencies and familiarize themselves with everything that the virtual market has to offer, its appeal continues to grow.
One of the benefits that have continuously been noted is its perception of a store of value. In other words, cryptocurrencies are viewed as assets that maintain their value as time passes and will continue to retain that value for many years into the future.
In addition, the progression of inflation will also have an impact on the relevancy of cryptocurrencies over the course of the next few years. To combat the rising prices of goods and services, many governments are rapidly printing out money faster than they ever did pre-pandemic.
This is causing investors to search for alternative solutions to combat inflation and many are turning to the digital market for ideas, and investing in cryptocurrencies, such as Bitcoin, has been a long-term strategy that many are beginning to warm up to.
However, if you’re looking for a safe, secure way to grow your wealth and invest in your financial future, do not overlook the benefits associated with investing in wonderful companies. When it comes to debating the benefits of investing in bitcoin vs. stocks, stocks have my vote every time.
If you’re new to investing or need some guidance on how to start building generational wealth, check out my guide for How To Pick Stocks: The 5-Step Checklist.
It’s the perfect tool to help you understand how the stock market works, how Rule #1 principles will help you generate consistent returns, and how to buy the right businesses for your portfolio at a great price.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.