Despite performance, bitcoin is simply not a good investment on paper.
At the same time, it’s hard not to feel foolish when everyone knows someone who’s become insanely rich just by buying bitcoin at the right time. So, even if it’s hard to justify on paper, isn’t it worth the risk of skyrocketing profits?
not yet, and here are two reasons why:
- you make strategic decisions with your money, and fomo is not an investment strategy
- fomo also implies that you will “miss out” on bitcoin’s huge returns year after year. but remember, the value of bitcoin is unpredictable; so to assume that it will continue to rise because it has been rising would be to fall prey to the gambler’s fallacy.
In short, the volatility of bitcoin, and the paucity of factors that dictate its market value, make it too difficult to predict and therefore does not fit an asymmetric risk profile in which the house (you) always win.
continued reading: how to trade cryptocurrencies (and if you should)
what are the additional risks of investing in bitcoin?
an investment in bitcoins is not only subject to market volatility; it’s also vulnerable to some serious external threats that could wipe out large amounts of value overnight, or even your entire portfolio.
Here are some examples to keep in mind when considering a bitcoin investment:
hacks, scams and theft
Hackers and scammers stole a record $14 billion worth of cryptocurrency in 2021, according to cnbc, which is a 79% increase over 2020 levels. Mt. gox handled 70% of the world’s bitcoin transactions when it was hacked in 2014, and 650,000 bitcoins were never returned to their rightful owners.
Now, you can protect your crypto from hackers by storing your private keys in a cold crypto wallet, which, unlike a hot crypto wallet, lives completely offline.
Further reading: Active vs. Cold Wallet Comparison
However, using a cold wallet introduces a new form of risk:
lose your cold wallet
what do a usb flash drive, a hard drive or even a piece of paper have in common?
everyone can be lost.
Just ask James Howell, who accidentally dropped the wrong hard drive in 2013 and has been looking for it in a landfill ever since. And who can blame him for getting his hands dirty and not giving up? there’s 7500 btc on that hard drive now worth over $277 million.
In total, 20% of bitcoins are lost due to lost or forgotten private keys.
More regulation not only threatens the portfolio of traders within that country’s borders, but may also cause global prices to plummet.
India attempted to enact anti-cryptocurrency legislation in 2018, but in 2020, the supreme court struck it down. This prompted Indian investors to “crowd in the market,” according to Reuters, only for a proposed new ban to appear in 2021, one that “officials are confident will be signed into law.”
Russia’s central bank also proposed a ban on crypto activity in 2022, and when China released plans for a new crackdown in May 2021, bitcoin fell $10,000 or ~25% in a matter of days.
In addition to tightening regulatory ties, bitcoin seems especially vulnerable to bad press. With such a speculative asset, it’s hard to pinpoint exactly what’s causing the cryptocurrency crash of 2022. But what’s unfolding in El Salvador is certainly not helping investor sentiment.
in september 2021, el salvador officially adopted bitcoin as the second legal tender behind the usd. But the launch of bitcoin in el salvador “is sinking the economy, and it’s a disaster in every way,” shawn tully writes in fortune. As of this writing, citizens are lining up to get rid of their bitcoin before prices drop further, and the international monetary fund has officially urged President Bukele to back off.
Judging from this week’s price stagnation, one could gauge that these two opposing forces (the media is destroying bitcoin and President Bukele refuses to back down) could be equating investor sentiment.
But when one exists without the other, the cryptocurrency market can take a nosedive. when tesla announced that it would no longer accept bitcoin, for example, values fell by 12%.
mark zuckerberg believes that we will all be in the metaverse within the next five to ten years. And while investors are already seeing great opportunities in virtual real estate and NFTs, the one asset that doesn’t seem to have a place waiting in the metaverse is bitcoin.
ethereum power nfts. cardano uses proof of stake to make smart contracts greener. companies like meta, walmart and others are developing their own proprietary stablecoins to use as stores of value.
so where does that leave bitcoin?
With high power consumption and limited practical uses, it seems bitcoin might be too old-fashioned for the metaverse. and as more investors realize this, they could start converting their btc into more future-proof crypto.
It’s quite telling that our friends at coindesk don’t even mention bitcoin in their guide to investing in the metaverse.
what about buying and storing?
is bitcoin a better long-term investment, then? should you just buy and save?
bitcoin’s messy short-term volatility, but staggering overall gains since 2012, have led many investors to consider a long-term investment.
after all, hodl is the unofficial creed of dedicated crypto investors.
for the uninitiated, hodl stems from a bitcointalk forum post in 2013, where user gamekyuubi, admittedly drunk on whiskey, proudly declared “i’m hodling”.
hodl eventually got his own acronym: holding on for his life.
so buy and save is still valid in 2022?
While bitcoin had an incredible bull run from 2012 to now, the growing threats may indicate that it has finally run out of jet fuel. at least some of the country’s top advisers think so.
“over the last 5 years it is up 3478%,” writes david hunter, cfa, caia, director of research and investments at cpc advisors. “Do people really think it’s going to go up another 3478% from here? $1,324,000 per coin?”
“It appears that the asymmetric payout you can get when these coins trade in pennies is no longer possible at 5-digit valuations. in fact, it looks like payments could be skewed in the wrong direction.”
varun marneni, cfp, executive vice president of cpc advisors, agrees.
cryptocurrency has lost $1 trillion since its peak,” he says. “Investors should not misclassify cryptocurrencies as a safe haven asset class.
varun’s final advice is to tread carefully before following the crypto stans into the breach.
$64,158 was the cost of bitcoin when odell bekham jr. he accepted his rams salary in bitcoin. At the time of this writing, bitcoin is at $32,240, which represents a 46.6% loss in his salary, before taxes.
how can I continue to make money with cryptocurrencies (without risk)?
There is a classic idiom that I think applies well to bitcoin:
During the gold rush, sell shovels.
Buying bitcoins outright is too risky for anyone trying to manage their money using asymmetric risk.
but there is still money to be made.
so what is the equivalent of “sell spades” for bitcoin? How can you benefit from the (potential) increase in the value of bitcoin and at the same time hedge your risk?
Here are some ways to invest in cryptocurrencies without buying any:
- buy crypto stocks
- buy crypto etfs
- mine it and get crypto for free (see how to start mining bitcoin in 60 seconds)
- buy blockchain stocks and etfs
- invest in companies that invest in crypto
the end result
bitcoin is the willys jeep of the cryptocurrency world. And just like that revered army truck, he fought and won some extremely important battles, helped pave the way for his successors, and deserves our respect for all the progress he’s made.
but at the same time, it’s an antique. it is insecure, unstable, and with each passing year, modern regulations try to eliminate it.
If you’re looking for a more future-proof investment “vehicle,” check out our guides on how to invest in cryptocurrencies and ETF 101.