Bitcoin (BTC) has been one of the top investments in the world since its inception in 2009.…
Bitcoin (BTC) has been one of the top investments in the world since its inception in 2009. Unfortunately, 2022 was a bloodbath for Bitcoin investors. The “crypto winter” has seen BTC prices plummet about 60% year-to-date since September 21, and investors must now decide whether to buy the drop or run for the hills.
Here are some things every investor needs to know about Bitcoin:
— The Bitcoin Bull Thesis.
— Crypto winter.
— Risks of owning bitcoin.
— How to invest in Bitcoin.
— The Future of Bitcoin.
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The Bitcoin Bull Thesis
Bitcoin investors may have been unsure about 2022, but there are plenty of reasons to be optimistic. First of all, Bitcoin remains the most popular and valuable cryptocurrency in the world with a market cap of more than $360 billion. Second, Bitcoin’s long-standing track record speaks for itself. Bitcoin crossed the $1 threshold for the first time in April 2011. In just over a decade, the price of the cryptocurrency surged as high as $68,789 in November 2021 before falling back to around $19,000 this September.
Bitcoin has a relatively loose correlation with other asset classes, making it a potentially attractive tool for portfolio diversification. It has a fixed offering, which means investors are not negatively impacted by dilution. Finally, its fixed offering may also make it an attractive hedge against inflation and a store of value, although its extreme volatility has limited its appeal in those departments up to this point.
When bitcoin eventually becomes the world’s universal digital currency, its demand will increase exponentially and so will its price. The decentralized nature of Bitcoin also helps secure the network, making it resilient to tampering, tampering, and fraud. Bitcoin can serve as a way for people around the world living in underserved regions or countries with unstable financial systems to protect their wealth and access essential financial services.
Unfortunately for Bitcoin investors, extremely high inflation prompted the US Federal Reserve to aggressively raise interest rates in 2022, sending risk asset prices plummeting. While Bitcoin bulls have touted the crypto as an inflation hedge, Bitcoin has actually had a positive correlation to stock prices in 2022.
Falling crypto prices exposed over-leveraged crypto lending firms and hedge funds, leading to multiple high-profile bankruptcies and the collapse of LUNA and its $60 billion related stablecoin Terra USD (UST). Even the world’s largest stablecoin, Tether (USDT), briefly lost its peg to the US dollar during the worst crypto winter volatility.
Sukanta Sekhar Das, CEO and co-founder of CoinMarketBag, says that inflation is the main reason for Bitcoin’s weakness in 2022.
“Inflation is certainly killing markets — and since BTC is more closely correlated with stocks than true believers might be comfortable with, it’s difficult to separate overall macroeconomic performance from that of Bitcoin,” says Sekhar Das.
“If we can get inflation under control, then I believe BTC will enter a bull market that will last through most of 2023,” he says.
Risks of Owning Bitcoin
It may seem a long time since Bitcoin’s first transaction some 13 years ago, but cryptocurrencies don’t have the long-term track record of other popular asset classes like stocks and bonds. As 2022 shows, Bitcoin is also prone to periods of extreme volatility, such as the roughly 80% plunge in late 2017 and 2018.
Furthermore, it is difficult even for financial analysts to determine a true value for Bitcoin as it does not generate cash flow or revenue, nor does it represent ownership of any physical assets or intellectual property. Instead, its price is tied solely to investor sentiment, which can be unpredictable and inconsistent.
Bitcoin also poses a significant risk to the environment. Bitcoin mining produces around 40 billion tons of carbon dioxide annually, a huge red flag for any investor concerned about environmental, social and governance, or ESG principles.
At this point, the cryptocurrency market is very loosely regulated. Up to this point, the U.S. Securities and Exchange Commission has repeatedly rejected potential Bitcoin exchange-traded spot funds, or ETFs, over investor safety concerns.
Ultimately, Bitcoin may pose a serious threat to fiat currencies and the traditional financial system. The more popular Bitcoin becomes, the more regulators can crack down on investors. More regulation could make bitcoin less attractive to some investors but more attractive to others.
Marcus Sotiriou, an analyst at publicly traded digital asset broker GlobalBlock, says regulatory clarity could open the door for more institutional Bitcoin investment.
“Government intervention in the crypto market is a major talking point among investors right now, as we don’t yet have the clarity we need for the crypto industry to thrive,” says Sotiriou.
How to invest in bitcoin
There are a number of different ways for investors to engage with Bitcoin. Investors can buy the cryptocurrency directly from their accounts on platforms such as Robinhood Markets Inc. (Ticker: HOOD), Coinbase Global Inc. (COIN), PayPal Holdings Inc. (PYPL) and Cash App.
Alternatively, more advanced traders can trade Bitcoin futures and options on futures contracts to gain leverage or to hedge their positions.
Investors can also buy shares of bitcoin futures ETFs or trusts. Popular bitcoin futures ETFs trade just like stocks on major US exchanges. These ETFs include the ProShares Bitcoin Strategy ETF (BITO), the VanEck Bitcoin Strategy ETF (XBTF), and the Valkyrie Bitcoin Strategy ETF (BTF). The Grayscale Bitcoin Trust (GBTC) is a $12.9 billion trust structured similar to an ETF that owns Bitcoin and trades over the counter in the United States.
Finally, investors can buy shares in companies that mine Bitcoin, hold it on their balance sheets, or benefit from its rising price. These stocks include companies like Coinbase, Block Inc. (SQ) and MicroStrategy Inc. (MSTR).
The Future of Bitcoin
Even after the blow Bitcoin prices took in 2022, the world’s most popular cryptocurrency is still up 81% over the past three years and 411% over the past five years (as of September 21). Bitcoin’s 60% sell-off this year might seem extreme, but the volatility that bitcoin prices have experienced this year is actually pretty typical. In fact, since 2015, Bitcoin has not completed a single calendar year without an annual gain or loss of at least 60%.
BTC’s volatility may be frustrating for investors, but it stems from the combination of Bitcoin’s tremendous potential and its utterly uncertain prospects.
Justin Daniels, co-chair of the Baker Donelson Blockchain and Digital Assets Technology Practice, says the entire cryptocurrency and blockchain space is still in its infancy.
“I think we’re going through a similar period to when we were talking about how useful the internet could be, and then we went through the dot-com bubble that burst,” says Daniels.
The stock market eventually rebounded from the bursting of the dot-com bubble, and Daniels says bitcoin prices will eventually recover from the crypto winter as well.
“In the long term, bitcoin will rally as we move to a cashless society. Regardless of its flaws, bitcoin is a much better alternative monetary system for people around the world who are either unbanked or whose government tightly controls the currency,” he says.
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Is it worth investing in Bitcoin? originally appeared on usnews.com
Update 9/22/22: This story was previously published and updated with new information.