“As the value goes up, heads start to swivel and sceptics begin to soften. Starting a new currency is easy, anyone can do it. The trick is getting people to accept it, because it is their use that gives the “money” value.” – Adam B. Levine
CryptoCurrencies such as Bitcoin readily make global headlines for various reasons. One of the reasons is the digital currency’s enigma, especially around its concept and how it is structured. The second reason is that, although it is a volatile digital currency, its value is high at the moment; however, there is no knowing what the currency will do in the short-term.
Bitcoin pricing: A case study
The advantages of using a case study or a practical example to illustrate a point has clear advantages. Ergo, it is easy to state that the Bitcoin price is volatile, but adding a concrete example adds weight to the topic. Therefore, here is a simplified study of the highs and lows that the Bitcoin price reached over the last year or so:
The Bitcoin price volatility can be seen by looking at its trading prices from the second half of 2016 until today (26 June 2017). It started off at around $650 to 1 Bitcoin in July 2017. It then had a strong run in latter half of 2016, reaching highs of $1,153.86 on 5 January 2017. However, seven days (12 January 2017) later it dropped to lows of $766.53. It started climbing again, and it is currently sitting at around the $2505 mark.
Bitcoin investments: The risks versus the rewards
The case study mentioned above clearly shows the volatility in the Bitcoin price; Ergo, it is important for all traders to plan their investment strategies accordingly.
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Anthony Di Maggio, a Senior FX Analyst at Stern Options, added weight to this argument when he was quoted in a FxPips.com article titled “Bitcoin’s Steep Price Drop is Harsh Reminder of Bitcoin’s Riskiness” as saying that “while the returns potential for holding bitcoin is very high, investors should be very clear about the fact that they can also lose half their money within a short period… Investors need to be aware that when putting money into Bitcoin they will need to tolerate massive price swings…. If investors want to invest in bitcoin, they should only allocate a small part of their overall portfolio to the cryptocurrency and put the rest into more mature asset classes, such as stocks and bonds.”
There is no doubt that investing in Bitcoin looks very attractive at the moment. Furthermore, it is made even more appealing by reading online articles on sites such as the Telegraph.co.uk that occasionally run with headlines about a high school dropout (Erik Finman) who bought $1000 worth of Bitcoins in 2011 at between 3 US cents (January 2011) and $4.74 (December 2011) per Bitcoin. The article details his investment successes and what he plans to do with his life now that he is a millionaire; however, the takeaway point for us is that his investment is worth over $1.09 million (at the current rate of $2700 to one Bitcoin).
The extremely high risks linked with investing in cryptocurrencies cannot be emphasised enough. On paper, Finman is a USD millionaire. Additionally, if he trades his Bitcoins for dollars, he will more than likely have over $1 million in the bank (depending on the Bitcoin price at the time). Moreover, because the rate is very high at the moment, and there is every indication that it will continue to increase, it makes sense that there is a strong attraction for Finman (and others) to increase the size of their Bitcoin investments.
Final Words: Personal investment goals versus risk management
However, based on the historical volatility of the cryptocurrency, the question that needs to be asked and answered, is what happens if the price were to drop sharply in a short space of time? In the short- to medium-term, investors are likely to lose large sums of money. However, as a long-term investment, and once again, looking at the historical price movement data, the price should recover and continue to increase.
By way of closing, the simple answer to the question of whether investing in Bitcoins is a good idea, it depends on each investor’s risk profile, experience, as well as his investment goals.