Bitcoin is generally regarded as the first mainstream digital currency. First commercially used in 2010, Bitcoin is now the most well-known and most widely accepted digital currency on the planet. It’s accepted by more companies and individuals than any similar alternative. Several countries have even made Bitcoin their national currency.
Like any traditional currency or stock, anyone can invest in Bitcoin by purchasing some and watching how it responds to the market. Unlike traditional currencies and stocks, however, Bitcoin’s value changes more quickly and more severely. That makes Bitcoin is one of the most exciting — and unpredictable — investments available.
Although Bitcoin can be appealing, investors should be cautious and educate themselves before investing. Here’s what to expect.
Is Bitcoin a Good Investment?
- Bitcoin is growing in popularity as a financial asset and investment opportunity.
- Unlike more traditional investments, Bitcoin can change value rapidly due to shifting supply and demand, variable national regulations, and so-called “whale” investors who can affect the space.
- You can purchase Bitcoin via online exchanges.
- Be sure to consult with a financial advisor before making any investments.
How Much Can Bitcoin Change in Value?
Bitcoin, like anything else that trades on a market, will experience substantial value changes. Over the years, the value of Bitcoin has shifted, sometimes dramatically: in 2019 each Bitcoin was worth about $5,000; by the end of 2019, that price had changed to $60,000; and throughout much of 2022, it’s hovered around $20,000.
Bitcoin is highly volatile, as the currency is available for international trade 24 hours a day. Estimates suggest Bitcoin can see value changes of 2 to 3 percent daily. By comparison, most currencies and precious metals only see average changes of less than half a percentage point daily.
This immense volatility makes Bitcoin riskier than many other investments. That volatility has an upside, however: The currency can also dramatically rise in value.
Why Is Bitcoin So Volatile?
Understanding the volatility of Bitcoin is critical to helping investors make wise decisions with their money. Here are the main reasons:
- Supply and demand. As with any investment, these two foundational concepts influence Bitcoin’s value. Prices become higher if there are fewer digital coins available to trade. Bitcoin is limited to only 21 million tokens, so the cost could increase when the available supply stops growing. Prices also rise when Bitcoin’s popularity fuels demands for the digital coin.
- State and National Regulations. In general, the fewer the regulations, the easier it is for people to adopt and use an investment. If people are prohibited from using Bitcoin, the currency cannot thrive and the demand is forced down. This can impact Bitcoin’s overall market value.
- Whales. Individuals or companies that hold large amounts of any digital currency are known as “whales.” When whales purchase or sell large stakes in Bitcoin, the market responds in disproportionate ways. A massive selloff of Bitcoin by one or more whales can signal that Bitcoin might have peaked in value. This can set off a chain reaction where others follow suit, which can quickly devalue the currency.
The trading volume for Bitcoin varies each day. But that volume can become substantial when new developments occur. The Bitcoin community is a close-knit group of investors and supporters with worldwide members that constantly seek the latest developments. They want to see how the currency is changing and what they can expect from their investments. Therefore, people will often look to see what the community is thinking about when figuring out if the currency may change.
How Do I Get Bitcoin?
One reason why Bitcoin is a popular investment is due to how easy it is for people to acquire it. Exchanges like Coinbase, Coins-e.com, and Cryptsy help people purchase Bitcoin online. Those exchanges include rates between Bitcoin and traditional currencies, also called fiat currencies, to help investors understand the costs of their potential investments. Exchanges also allow investors to exchange cryptocurrencies and fiat currencies on their platforms.
Investors also need cryptocurrency wallets. Crypto wallets store critical data about investors’ currencies. This includes the public and private keys necessary for financial transactions to occur safely, privately, and with accountability. Wallet keys are essential for encrypting and decrypting data, a function that prevents unauthorized parties from accessing other people’s currencies.
As Bitcoin has become more and more mainstream, accessing your Bitcoin has as well. Bitcoin ATMs are becoming more common. These machines allow people to purchase Bitcoin, exchange crypto assets, and withdraw Bitcoin as fiat currency.
Another important reason that Bitcoin is so popular is that it pioneered the ability for investors to purchase fractions of coins. Bitcoin tokens are divisible to eight decimal places. That permits those with limited funds to still become users and investors.
Bitcoin as a Financial Asset
Bitcoin is relatively new in the market compared to more traditional investments like stocks and bonds. That makes it unique and somewhat attractive to casual investors. That uniqueness has also led to a question whose answer might involve governmental oversight: Are Bitcoins and other cryptocurrencies securities or a commodities?
Some consider cryptocurrencies like Bitcoin to be commodities because — like traditional currencies — anyone can use them to purchase goods and services; others consider some cryptocurrencies to be a securities because the digital coins that get purchased are investments in the companies that issue them..
One thing is certain: Bitcoin’s unique and unpredictable nature makes it appealing to many investors and portfolios.
Investing in Bitcoin
Bitcoin, like any other investment, comes with risk. The volatility of its price and the unpredictability of its value are substantial concerns. But security is also an issue; like all technologies, malicious hackers can and do find ways to exploit digital currencies and the platforms on which they operate. Hundreds of millions of dollars of cryptocurrency are stolen every year.
Bitcoin can make for an appealing investment when you consider all factors. It can even work alongside other individual investments like stocks or bonds to better diversify investors’ portfolios. As always, it’s essential for investors to educate themselves and to work with financial planners and fiduciaries who have substantial experience in this space.
