Last Updated on May 15, 2024
With the current rally on bitcoin many people are starting to wonder if they too should invest in bitcoin.
Is bitcoin a good investment?
Yes. A speculative one, but good nonetheless. In fact 2019 may be the last year bitcoin is a good investment.
Let me preface with a warning: there are lots of good reasons not to invest in bitcoin and I’m not saying it’s a good investment because I expect bitcoin’s price will go up in 2019. It may go down. But bitcoin has several things going for it that many other types of investments don’t, even other cryptocurrencies that may offer bigger upside. My personal investing experience comes mostly from real estate and owning small stakes in private companies, totally different types of investing than cryptocurrency. Take what I say from the viewpoint of somebody with much more patience and tolerance for risk and effort than your average crypto cat but somebody who doesn’t trade or get caught up in the daily price swings.
The pro-bitcoin case
Bitcoin’s Lightning Network is already reducing bitcoin transaction fees to fractions of a penny and reducing confirmation time to one second. This eliminates the biggest complaints about bitcoin as a payment network: “it’s too expensive” and “it’s too slow.” LN introduces some other problems but improves utility to the point it can compete with any traditional electronic payment system. Opennode, a new venture by crazy (but successful) investor Tim Draper, will be the first payment processor to use LN. Bakkt plans to eventually do something similar for Starbucks, creating a way for retailers to use bitcoin to settle transactions more quickly and less expensively than Visa/PayPal etc without forcing customers and merchants to actually own or hold bitcoin. Smaller, lesser-known entrepreneurs are trying to do the same thing, and with LN this effort will be much easier. Transactions will start and end in local currency, with bitcoin settling the transaction. Once LN runs on enough nodes, bitcoin will be a compelling alternative to traditional payment systems. If merchants switch to bitcoin-based payment systems, this will create a constant demand for bitcoin without forcing people to suffer bitcoin’s characteristic swings in volatility because merchants and users will never hold bitcoin, they will simply use a third-party to rent bitcoin for however long it takes to complete a transaction. This activity will create constant demand for bitcoin.
DriveChain is attempting to make it easy for developers to improve bitcoin without having to fork off a new chain. Rootstock is one of several efforts to deliver smart contracts using bitcoin’s blockchain. Dozens of developers are working on “second layer” interfaces that leverage bitcoin’s features. If any of these efforts succeeds, you will see even more activities that create constant demand for bitcoin.
Since bitcoin’s supply is fixed, nobody can boost supply. Higher demand will send prices higher.
On top of that you still have people who are buying bitcoin solely to sell it for a profit. We’re at a level that suggests, based on price history, that bitcoin’s price will go up not down:
Also, bitcoin has recently seen more volume on exchanges without falling in price. According to people who trade, this signals an expectation the price will go up, at least short term. Sellers have basically left the market. Of course, these sellers can come back at any moment, so, take it with a grain of salt.
Last, think about the risk/reward. A lot goes into this, including your own emotions and perspective and financial situation. Setting that aside, here’s the investment case. You have $100. You have many choices for how to invest that $100, but you decide bitcoin is worth a gander. Your $100 investment will produce two outcomes at the extreme:
Outcome 1: bitcoin never goes up again, history doesn’t repeat itself, bitcoin dies. You lose $100.
Outcome 2: bitcoin goes up again, history repeats itself, bitcoin lives. You make $1,000.
Option 1 has never happened. Option 2 has always happened. If you need your money you can cash out any time. Your likely outcome returns $1,000. Your unlikely outcome loses $100. Which would you choose?
Why now is the probably the last time bitcoin is a good investment
If bitcoin establishes traction, it will no longer have the wild volatility of today. You’ll have so many people buying and selling and using it that you’ll always have somebody to meet your price, as well as lots of the token circulating within its ecosystem. This volume will smooth out volatility, as it does with every other commodity on earth, including your local currency.
At that point, the idea of buying bitcoin with expectation it will go up in value will make as much sense as buying theater tickets for the sole purpose of reselling them for profit. A few people will do that, but most people will just buy tickets when they need to. They might wait for prices to go down or shop other vendors for lower rates, but they’re not going to buy a ticket expecting to profit—they’re going to buy because they want to see a show. Likewise, people will only buy bitcoin because they want to do something that requires bitcoin. Demand for bitcoin will lead prices to rise over time.
You now have a chance to buy bitcoin “tickets” for a fraction of their future value. Some say you’re buying these tickets before the theater’s even built.
Your only risk is that nobody will want to see the show, in which case, you will lose all your money. Bitcoin has no refund policy.
My take is this: invest in bitcoin. Even if it’s just a small percentage of your portfolio.
Read also: My crypto portfolio.
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