Just last month, Bitcoin, by far the most well-known cryptocurrency and the one with the largest market capitalisation, reached an all-time high of above US$66,000.
This new high was spurred by the launching of the first Bitcoin Exchange Traded Fund (ETF), known as the ProShares Bitcoin Strategy ETF, in mid-October.
This positive news, alongside the influx of retail investors buying into Bitcoin, drove cryptocurrency’s price higher than ever before.
With new price discoveries every few months, and prominent figures like Elon Musk and Eric Schmidt touting its huge potential, you might be wondering if it’s advisable to include some Bitcoin into your investment portfolios.
Before going any further, it’s best to familiarise yourself with Bitcoin.
What is Bitcoin?
Warren Buffett once said, “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”
Of course, this was given in the context of stock investing, but it can be applied to any investment vehicle. The main lesson from this quote is that you should always understand what you invest in. This goes for Bitcoin as well.
Bitcoin was first mentioned in a whitepaper back in 2008 by the elusive Satoshi Nakamoto. To this day, no one has any idea who Satoshi is, or even if he or she is a singular person and not a group.
The “Bitcoin” described in this whitepaper was presented as a currency that relied on digital signatures, miners and tokens instead of a centralised government to give it value.
In Satoshi Nakamoto’s own words, Bitcoin would allow “online payments to be sent directly from one party to another without going through a financial institution.”
Needless to say, this was a potential revolution. An alternative to regular (fiat) currency had always been an idea, but no working large-scale solutions existed.
Fast-forward to today, Bitcoin is more popular than ever, and although it is not globally accepted as an alternative to regular currency just yet, there is already at least one country that has accepted Bitcoin as a form of legal tender.
But why is Bitcoin so popular and so highly valued? And is it a worthy inclusion into investment portfolios?
Why is Bitcoin so popular?
Bitcoin was the very first cryptocurrency to exist in the market. This first-mover advantage, and its role in popularising blockchain technology and cryptocurrencies in general, quickly shot it to the forefront of public popularity amongst cryptocurrencies.
In fact, the entire cryptocurrency industry was built upon the ideas spearheaded by Satoshi Nakamoto for Bitcoin, so much so that Bitcoin’s price movements influence all other cryptocurrencies in the market.
Today, although Bitcoin does not have its sheer dominance of a few years ago, it is still the largest cryptocurrency with a market cap at around US$890 billion.
Bitcoin’s popularity has also contributed immensely to its massive valuation. As of today, a single Bitcoin is worth more than US$61,000. However, popularity isn’t the only factor behind its value.
Bitcoin is also available in limited supply. The maximum number of Bitcoins that can ever exist is 21 million. This fact, coupled with its tremendous popularity and investors’ belief that Bitcoin will be worth more in the future than it is at present, has made Bitcoin and its price what it is today.
Should you invest in Bitcoin?
As with all investments, you should consider the risks. The cryptocurrency industry is still relatively young, which means that it will take time to stabilise.
The fact that Bitcoin went from roughly US$30,000 in the beginning of the year, to US$60,000, and then back down to US$30,000 and back up again to US$60,000 in 2021, is sufficient evidence of its volatility.
However, a young industry isn’t always a bad thing as it means there’s also huge potential for growth.
Technological advancements, institutional investors entering the space such as Tesla and Square, as well as bullish news such as Facebook (Meta) showing an interest in the cryptocurrency space, are all positive and exciting indicators of what this industry could hold in the future.
Understanding both the volatility and the incredible potential of Bitcoin and cryptocurrencies, it is then time to consider a very important factor: you.
Firstly, think about why you want to invest in Bitcoin. Is it because you have a genuine belief in Bitcoin as an asset, the technological merit of blockchain technology, or if it’s simply because Bitcoin happens to be the talk of the town?
If it’s the latter, then don’t succumb to the Fear of Missing Out (FOMO). Read up more about the technology and the industry as a whole before deciding if you want to invest.
Secondly, it’s time for some serious self-reflection. Consider if you can afford to hold Bitcoin. Can you stomach the constant rise and fall of Bitcoin’s value? Bitcoin, along with most other cryptocurrencies are infamous for being volatile, and that is why you should only start investing with what you can afford to lose.
If you are in a situation where you cannot afford to ride the roller coaster of price spikes and drops, then it is advisable that you wait until such time when you are comfortable enough to invest.
However, given that you can buy small amounts of Bitcoin, starting from as low as RM1 on Luno, perhaps you could start with an amount that you can afford losing should Bitcoin plunge the very next day.
You should also consider what portion of your investment portfolio you are allocating for Bitcoin. You might also consider hedging your Bitcoin investments with investments in lower risk assets such as stocks, unit trusts or bonds. These hedges will help you stomach the ups and downs in your portfolio’s exposure to Bitcoin and cryptocurrency.
Once you have sufficient knowledge about the technology and underlying fundamentals, you can head to Luno and register for an account today. You can get started with just a bank account and funds in Malaysian ringgit. May your crypto journey be a fruitful one.