Bitcoin investing pros and cons

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Bitcoin may have been around for more than 10 years, but it continues to experience wild price swings leading many to question its viability as an investment.

Afterall, not everyone can stomach seeing their investment tank by nearly 50% in just a few short months as was seen in the first half of 2021.

But, despite this volatility and the uncertainty over the future regulation of cryptocurrency in the UK and elsewhere, many individuals and institutions are still jumping on board and piling cash into crypto.

Whether Bitcoin (BTC) is a good investment in 2021 and beyond is often down to an individual’s appetite for risk and their personal view on the future of digital currencies as both a store of value and an asset class.

If you believe that a decentralised digital currency will be an integral part of the world in years to come, then crypto could be for you.

However,  if you’re on the other side of the fence and see Bitcoin as a speculative bubble ready to burst then you should probably steer clear.

Below we list some of the pros and cons of investing in Bitcoin.

Is Bitcoin a gamble rather than an investment?

The world is still finding its feet with crypto and there are still many unknowns and uncertainties about its future. This makings forecasting its profitability in years to come extremely difficult.

Some people believe investing in Bitcoin is more of a gamble than a sound financial decision – you might get lucky if you time it right, or you might lose all your money.

Others see the only way as up for Bitcoin, offering optimistic price predictions ranging from $100,000 to £1 million per coin in years to come.

It’s fair to say though that critics and proponents are split.

Every so often someone will liken Bitcoin to the Tulip mania of the 1600s – a price bubble which burst spectacularly in 1637, or claim the token will become the only currency in use when the traditional financial system collapses.

Who will be proved right or wrong is anyone’s guess right now.

Market-leading asset class based on returns

However, despite the occasional stomach churning price movements in the crypto market, Bitcoin and altcoins keep rebounding to reach new all-time highs (ATHs), giving supporters ammunition to hail crypto as the future of investing.

In short, people have made – and continue to make – a lot of money by investing in crypto.

Many of these are investors with diamond hands, ie ‘hodlers’ who’ve kept their coins through thick and thin and not dumped at the first hint of a correction.

But will this trend continue? Is Bitcoin destined to soar to even great ATHs or will interest in crypto fizzle out?

Here we examine both sides of the debate. Hopefully it’ll help you decide whether to add crypto to your portfolio.

Reasons why Bitcoin and crypto might be a good investment:

  1. Greater adoption by individuals. Interest in Bitcoin and altcoins has surged over the past year. The bull run saw the price of Bitcoin reach $64,000 at one point before it came crashing back down to around $32,000 at the time of writing (still considerably higher than in 2020). Social media channels such as TikTok, Twitter and Instagram have been flooded with new crypto-related accounts which have helping bring crypto into the mainstream. The number of new Bitcoin wallets has also grown exponentially in recent months. In the UK along it’s estimated that some 2.3 million adults now hold crypto.
  2. Growing institutional interest. MicroStrategy, Tesla, PayPal and Square are just some of the corporate giants that have engaged with Bitcoin and crypto in one way or another in recent months. MicroStrategy has added huge amounts of BTC to its reserves, Tesla at one point said it would accept Bitcoin as payment for its cars before reversing the decision due to concerns about the amount of dirty energy used to mine the crypto, PayPal has integrated Bitcoin into its service and Square is planning to roll out a Bitcoin hardware wallet. This all demonstrates a growing confidence in crypto as an asset class that’s here to stay.
  3. New Bitcoin investment products. An increasing number of financial behemoths, both old and new, are entering the crypto space. For example, Grayscale, the world’s largest digital asset manager, offers a range of trust offering exposure to Bitcoin and other cryptos, such as Ethereum, Bitcoin Cash and Litecoin.  Ark Invest, another asset manager, is working on a Bitcoin ETF, as is Fidelity, First Trust and Wisdom Tree. All are currently awaiting approval. Other banking giants are expanding into Bitcoin by creating crypto desks designed to satisfy the growing demand from clients.
  4. Countrywide adoption. Earlier in 2021 El Salvador became the first country in the world to officially make Bitcoin legal tender for its citizens. President Nayib Bukele proposed the move, later approved by congress, which means every business must accept Bitcoin for payment, alongside the US dollar. In the US, both Miami and New York are competing to become the Bitcoin capital of the country and are encouraging blockchain and crypto companies to set up shop in their respective cities.
  5. Liquidity. The surging interest in crypto has led to a Cambrian explosion in the number of exchanges, trading platforms and online services relating to Bitcoin and altcoins. This means that dealing in Bitcoin has never been easier or more accessible. An increasing number of user friendly platforms are setting up as well, with the aim of bringing Bitcoin to the masses. This means there’s a huge amount of liquidity in the Bitcoin market (along with other major cryptos).
  6. Blockchain technology. Whether you believe in cryptocurrency or not, there’s no doubting that blockchain technology is here to stay. It has a wide range of real-world applications – Decentralised Finance (DeFi) and smart contracts being just a couple of examples – which are being adopted by major organisations around the globe. New use cases for blockchain technology are emerging all the time.
  7. Bitcoin is scarce. There will only ever be 21 million Bitcoins in existence, unlike other cryptocurrencies where the supply is virtually unlimited (Dogecoin for example). When you factor in the number of coins that have been lost (such as 7,500 by Newport IT worker James Howells) that supply becomes a lot smaller. Because of this, Bitcoin is often seen as the digital gold of the cryptocurrency world and a store of value rather than a coin to be used for everyday purchases. This supply cap that’s hard-coded into BTC also differentiates it from Government-issued fiat currencies, where more can be printed at any time.
  8. Bitcoin ATMS. The number of Bitcoin ATMs in use around the world is growing rapidly. These enable anyone to buy (and sometimes sell) Bitcoin using a debit card or even cash. The rules on anonymous use are being tightened up though, and Bitcoin ATMs often require some form of photo ID before you can purchase crypto. However, it’s another step towards opening up the sometimes opaque world of crypto to people who would have otherwise been unable to access it.
  9. Diversification. Any good financial adviser will tell you that the key to a profitable portfolio is diversification. However, this means different things to different people and is often dependant on the amount of risk you’re willing to take. There’s no doubt that Bitcoin and crypto is a massively risky investment with the potential for huge losses. But equally, the gains seen by crypto investors over the past few years have been stratospheric in some cases and who knows what’s to come. If you’re happy with a high level of risk, putting a small percentage of your portfolio into crypto – on the understanding that you could lose it all – might be the right thing for you.
  10. Too big to fail. The rapid growth in adoption from both retail and institutional investors alike means there’s a lot of people with very deep pockets who want to see Bitcoin succeed. Also, because of the decentralised nature of crypto, even bans by Governments and countries won’t stop it from circulating. The only way to ‘switch off’ Bitcoin would be to shut down the entire internet.

Reasons why Bitcoin and cryptocurrency might be a bad investment:

  1. Increased regulation. The exponential growth of Bitcoin and the cryptosphere has not gone unnoticed by Governments and regulators. Many countries around the world are considering new rules and legislation surrounding the use of crypto. In the UK the Financial Conduct Authority (FCA) does not regulate crypto exchanges, although it does issue licences for crypto-related business to operate. In the US, there are calls for the Securities and Exchange Commission (SEC) to regulate Bitcoin.
  2. Outright bans. China sent shockwaves through the crypto ecosystem when it banned Bitcoin mining activities in the country. Until this point, the country was responsible for around 80% of all Bitcoin mined in the world. In the UK, the FCA banned Binance, one of the largest crypto exchanges in the world, from operating Binance Markets Limited in the country (clients can still trade on the international site though) and certain regulated activity. This was quickly followed by Barclays, Santander and Faster Payments blocking money transfers to the platform. A lax approach to Anti-money Laundering (AML)  compliance was one of the reasons for the decision. None of this will stop Bitcoin, but it may substantially curtail how accessible it is and reduce the marketplace.
  3. Extreme volatility. It’s said that you need diamond hands to successfully trade in crypto and it’s easy to see why. Bitcoin can often experience double-digit price movements in a day or so – making it popular with traders but difficult to use as a method of payment for goods and services. This lack of stability has meant that Bitcoin is yet to be widely accepted by shops and businesses as there is no certainty over the value of the coins. This volatility tends to be led by Bitcoin and trickles down to the thousands of altcoins that now exist in the cryptosphere. Also, the price of Bitcoin has been shown to be capricious as demonstrated by Elon Musk when he Tweeted about Tesla and its relationship with Bitcoin.
  4. Government-backed cryptocurrencies. Countries around the world are investigating setting up their own Central Bank Digital Currencies (CBDCs). In the UK, the Bank of England (BoE) is consulting on introducing a ‘Britcoin’. China is already trialling the digital yuan. Any such moves would likely be accompanied by greater regulation and control which would undoubtedly filter out to the wider cryptosphere. Also, people may be less willing to adopt ‘outsider’ cryptos if can they use one backed by a Government which would likely come with protection, such as the Financial Services Compensation Scheme in the UK. This centralisation, however, contradicts the original ethos of a Bitcoin as a borderless global currency designed to liberate people from the mainstream financial system. Also, banks could produce as much CBDC as they wanted without the scarcity cap of Bitcoin and other cryptos creating the same issues, such as rising inflation, associated with fiat money.
  5. Scams and hacks. The lack of regulation in the cryptosphere means that it’s become a haven for scam artists and crooks trying to fleece unsuspecting users out of their Bitcoins. Just as in the ‘real’ world, crypto scammers can be incredibly inventive when it comes to thinking up new ways to separate individuals and companies from their crypto. There have also been many high-profile hacks where millions of pounds worth of crypto has been stolen from exchanges. This makes many people anxious about entering what they see as a murky, unregulated world. Read more about Bitcoin scams and how to avoid them.
  6. Advancement threat.  Processing power is evolving at a blistering pace and quantum computing is seen as the next big leap. Whether it’s this, or another computing technology yet to be invented, there is the potential for Bitcoin to be rendered obsolete or even insecure (although this is contended by some who argue we’re hundreds of years away from computers powerful enough to crack BTC). Either way, it’s impossible to predict what’s around the corner or what new, improved version of crypto many spring into life. Although not technological in nature, unpredictable threats to the price of traditional assets, such as gold, also exist. There are several rumours surrounding huge gold reserves that have been discovered then intentionally left unmined to avoid a collapse in the price of the precious metal.
  7. Real-world use. There are currently several problems with using Bitcoin in the real world. They include: price volatility, as we’ve already mentioned, the time it takes to confirm a transaction (30 minutes or more if the network’s busy) making it impractical for paying for many items, and high mining fees – the cost added to any transaction to facilitate it being processed. These restrictions all make Bitcoin less than appealing as an actual currency to rival cash.
  8. Lack of privacy. Despite most people believing Bitcoin is completely anonymous, it’s not. There are many ways of tracing Bitcoin transactions, with some being more technical than others. For example, a large portion of people who use crypto do so via an exchange where they’ve signed up with their personal info and ID. All transactions made from that account are now linked to them. It gets a lot more complicated than this, but either way a large percentage of Bitcoin transactions are traceable in some way. There are many other tokens out there which are far more private to use which may appeal more than Bitcoin, especially as Government’s are increasingly turning the spotlight on crypto.
  9. It’s bad for the environment. Performing the hugely complex calculations needed to mine Bitcoin consumes vast amounts of electricity, often produced by ‘dirty’ power plants that run on fossil fuels. In fact, it’s believed that Bitcoin mining electricity consumption is the same as the power used by countries such Sweden or Malaysia. With the world marching towards greater sustainability, this lack of green credentials is likely to put many people off, as it did Elon Musk who, as I’ve already mentioned, performed a U-turn on his Tesla decision. However, great strides are now being made to use green energy to power mining farms after Mr Musk stated that if more than 50% of Bitcoin electricity was produced in a sustainable way, he would reconsider his decision. You can read more about the most environmentally friendly cryptocurrencies here.
  10. Newness. Bitcoin, which is often dubbed the granddad of cryptocurrency (although it wasn’t actually the first), was created in 2009. Many of the other major coins around today, such as Ethereum and Litecoin, are even newer meaning large swathes of the population either view them with suspicion or simple don’t understand what crypto is and how it works. This is often reflected in the views of financial commentators who swear by the stock market (even though buying individual shares can often be volatile and risky). As an increasing number of younger, tech-savvy individuals get involved in the cryptosphere, this barrier is likely to be eroded. However, no-one knows if the world will suddenly lose interest in Bitcoin or if it’s here to stay.

What’s the future of Bitcoin and cryptocurrency?

As  you can see from the pros and cons above, without a crystal ball, this is very difficult to say.

There are currently so many unknowns and the landscape is rapidly changing as new regulations are introduced and technologies evolve.

Banks are clearly worried too, as decentralising money will hit them where it hurts – the pocket.

For this reason, there’s likely to be a lot of manufactured FUD (Fear, Uncertainty, Doubt) coming from these quarters. The PR machine is in overdrive.

Afterall, if they can’t control it, they can’t profit from it.

Price predictions vary so much it’s impossible to say what Bitcoin will be worth in 2021 or further ahead.

Should I invest in Bitcoin and cryptocurrency and add it to my portfolio?

I’m not going to give you financial advice, but I hope this piece has offered some insight into the crypto landscape and helped you establish whether it’s the investment for you.

Often with investing there’s a bit of luck involved as well.

If you’re old enough to remember the dotcom bubble in the late 1990s you’ll know that while a lot of people lost money, some made fortunes because they bought – and held – shares in the ‘right’ companies (Amazon anyone?).

It’s never been easier to obtain Bitcoin in the UK and around the world thanks to exchanges such as Coinbase.

Some people might embrace crypto simply to be part of a moment in history, others are hoping to make a few quid.

And then there are those who’ll dismiss it because they don’t understand it, whole others will say their research shows the fundamentals just don’t stack up.

Either way, crypto is a thing right now. Some people have already got very rich from it, while others may be hodling for even greater gains.

Will their gamble pay off, or will they lose it all? Only time will tell.

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Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice.

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