Digital currencies (also known as crypto-currencies) have officially become a legitimate form of investing; the largest being bitcoin. Bitcoin has been used by online firms and traders all over the world since 2008, and has turned early investors into millionaires. But is bitcoin a good investment?
Bitcoin is used for two reasons; the first is long-term investment. In 2015, A Norwegian man discovered a $ 27 bitcoin investment he made in 2009 had grown to $ 886,000.
Bitcoin is used for online payment. Expats can send money home and at a cheaper rate when using bitcoin rather than through their bank. That’s why more and more businesses are starting to accept bitcoin; Tesla Motors, Virgin Galactic, and Dell are just three companies that are now accepting the digital currency.
For all bitcoins benefits, it still has its flaws. For example, you can easily lose money due to inflation. Conventional investments like stocks, bonds, and real estate are all made with the goal and expectation of generating cash. This is not the case for bitcoin; investors can only hope its value rises with inflation. In fact, you will likely be looking at net losses after expenses with an investment like bitcoin. This is because bitcoin is pay to play. You must buy in at a higher price than their value, the reason being the person selling to you has no incentive to do so otherwise.
The second issue bitcoin is mean reversion. Mean reversion is a technical term for “what goes up, must come down” and vice-versa. All investments are subject to mean reversion, and bitcoin is no exception. The difference is that investments such as commodities provide an investment return at just about the rate of inflation – before fees. Commodities depend solely on price appreciation to provide an investment return. This is because commodities don’t generate cash. If you are looking to get a return from bitcoin, it’s best to not buy at a market top. The soaring price of bitcoin suggests we have possibly market top already, or at least very close.
The bottom line is this; when it comes to bitcoin, you should only invest as much money as you are willing to lose. Investing in bitcoin is like playing the lottery, it does not cost a fortune, but you are taking a chance nonetheless. It’s better to choose a long-term investment strategy that is not as volatile.
If you are seeking investment advice, Elite Private Wealth can help. Call us today at 905-707-5620 or find out more about our investment services here.