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Is Bitcoin A Good Investment?

By Louis H-P on April 1, 2022

Reading Time: 4 minutes

In the last couple of years, cryptocurrencies have become increasingly popular. However, no cryptocurrency is worth as much as the first crypto, Bitcoin. As of this writing, the price of a single bitcoin is above $46,000. At one point, in late 2021, the cryptocurrency’s price soared above $67,000. With such a high price, it might seem like a good investment. However, before you decide to cash out part of your stock portfolio to begin investing in Bitcoin, take a step back and ask yourself if it’s a good investment for you.

Key Takeaways

Why bitcoin is inferior today compared to its launch

Do you know the pros and cos

Which other currencies could be attractive


A Brief History of Bitcoin

As the first cryptocurrency, Bitcoin has a high degree of recognizability and the advantage of being the first to market. The concept of a digital currency, based on blockchain technology, was suggested in a whitepaper circulated by an author (or authors) designated Satoshi Nakamoto.

No one knows who Nakamoto is, but Bitcoin launched in 2009 as the first peer-to-peer digital currency. It operates using a distributed ledger, with all transactions verified across the network.

When it launched, transactions times were fast, and fees were relatively low. In the years since Bitcoin emerged, however, transaction times have slowed. As a result, fees are higher, and it’s more difficult to mine new coins. Additionally, the max supply is set at 21 million coins — and there are currently almost 19 million in circulation.

Today, even though some people use Bitcoin as a medium of exchange, it’s more often used as a store of value. As a result, some refer to it as “digital gold.”

Pros and Cons

When making any investment, it’s important to consider the pros and cons of that asset. Here are some of the considerations:

Pros

  • Considered a store of value: Many enthusiasts consider Bitcoin a store of value. As a result, it could potentially increase in price over time.
  • Decentralized: There’s no central authority controlling the network. Instead, a consensus mechanism governs the blockchain. Any cryptocurrency can be attractive for those interested in an alternative that a central bank doesn’t control.
  •  Transparency: All transactions are available on a public ledger, and it’s possible to have complete transparency.
  • Highly liquid: Because Bitcoin is so popular and frequently bought, sold and traded, it is easy to invest in this cryptocurrency. Additionally, it’s possible to buy in smaller increments because it is available in fractions. This makes it possible to invest, even if you don’t have tens of thousands of dollars for one token.

Cons

  • Price volatility: The price of Bitcoin is highly volatile. It can lose a significant portion of its value in a short period.
  • Transactions can be slow: Transactions can be slow because the Bitcoin network limits data block sizes. They are much smaller than other block sizes on other chains. While there are solutions, like the Lightning Network, some feel that other cryptos could potentially outstrip Bitcoin in utility.
  • Difficult to use as a currency:  Completing transactions using bitcoins can be difficult because of the price fluctuations. The price could change drastically. Additionally, there is no use case beyond transactions or being used as a store of value.
  • Uncertain future: There’s no guarantee that blockchain technology and cryptocurrency will go mainstream. Even if it does, regulation could change the landscape. Government oversight could reduce popularity, or the issuance of a central bank’s digital currency could render it irrelevant.

Should You Consider Other Cryptocurrencies Instead of Bitcoin?

Is bitcoin a good investment: other cryptocurrencies may be more interesting

While Bitcoin does offer potential, some enthusiasts point to other cryptos as potentially better investments. Like Ethereum and Solana, other blockchains offer far more uses than Bitcoin.

For example, both Ethereum and Solan facilitate smart contracts. Additionally, you can build apps on these infrastructures. Ethereum has an extensive decentralized finance ecosystem,  and Solana is also building one out. Ethereum is the most popular blockchain for non-fungible tokens (NFTs), which has driven its popularity.

Other cryptocurrencies provide different use cases that can be attractive to investors. For example, Polkadot offers interoperability between blockchains. In addition, chainLink provides a way for you to bring data outside the blockchain onto the blockchain.

Rather than assuming Bitcoin is the best choice for you, research other digital assets to determine if something else might be a better fit for your stock portfolio. For example, if you’re hoping to ride a wave to the future, other cryptos might be better.

Is Bitcoin a Good Investment for Your Portfolio?

Rather than wondering if Bitcoin is a good investment, think about whether it’s suitable for your portfolio.

Ultimately, Bitcoin is part of a new asset class. As such, it’s still considered a speculative investment. While Bitcoin offers potential, it’s essential to review your own investing goals. Look at your portfolio strategy to determine whether adding bitcoins makes sense. What purpose would Bitcoin serve as part of your portfolio?

Some investors like having a speculative investment like Bitcoin in a portfolio to add diversity and growth. If Bitcoin increases in value over time, you could benefit by having some in your portfolio.

However, it’s also important to note that Bitcoin could lose value, negatively impacting your portfolio. If you decide to invest in any crypto, consider limiting the amount you keep in your portfolio. Also, consider diversifying with other cryptocurrencies. If a crypto other than Bitcoin “wins” the digital asset war, you could come out ahead, even if Bitcoin drops in price.

Many experts suggest limiting your exposure to alternative assets to about 10% of your portfolio.

Conclusion

Bitcoin is part of a new asset class that is growing in popularity. Its price is currently in the tens of thousands of dollars. However, the price is also volatile, and there’s no guarantee that it will continue to rise. In addition, there are other cryptocurrencies and digital assets that are less expensive and have the potential to supplant crypto in the future.

Before you buy bitcoins for your investment portfolio, research your choices. Consider shoring your portfolio up with index products and value investments before adding speculative assets like cryptocurrencies. Review your portfolio strategy and goals, and then decide how much you can risk investing in Bitcoin or other cryptocurrencies.

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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