Should you buy bitcoin?
Back in 2010, the highest price for bitcoin for the year as just $0.29. Now in 2017, it touched a high of $17,549 before settling at about $14k in the first month of 2018. This has fueled a collective insanity round “cryptocurrencies” which has led to an irrational gold rush worldwide. So, should you invest in bitcoins right now?
But first, we need to understand why bitcoin has become such a big phenomenon.
There are only 21 million bitcoins that can be mined and it has a market cap of $238bn. As of Jan 2018, there are about 16.7 million bitcoins in circulation. As time goes by, it gets more and more difficult to mine. Compare it to gold as an example, as you mine more and more gold, there is less of it left on earth and it gets harder and more expensive to find it and mine it. The same is true with bitcoin.
Then we come to our next question, should you try and mine bitcoins? The best mining rig generates about 0.11 bitcoins per month, i.e. about 9 months to generate 1 bitcoin at todays difficulty. This difficulty increases as more and more bitcoins are mined. However, mining for an individual is not profitable today unless you are “cloud mining” or through a mining pool. The investment required for the hardware, electricity costs which are extensive, and the maintenance cost of your rig makes mining quite prohibitive.
Therefore, the only way to make money off bitcoins is to trade them, i.e. you buy them at a lower rate and analyze the trends well enough to know when you should be selling them off. if look at the history of bitcoins, you will notice that the prices generally increase at a very fast pace, followed by a slow and steady downfall till it stabilizes for a period and then the cycle repeats itself.
To understand this cycle, we now need to look at the factors which influence the bitcoin price:
1. Government Regulation: Many governments have made statements regarding the regulation of digital currencies. Depending on whether it’s positive or negative, the prices rise or fall. In the past few months, Japan, China and South Korea have had a significant influence on the bitcoin prices. Although China and South Korea have clamped down on bitcoin, investors from both these countries are paying a premium to pay invest in cryptocurrencies. Japan has already recognized bitcoin as a legal tender has contributed in driving up prices. As more and more nations legitimize bitcoin as a legal tender, the prices will increase, however, a further clampdown will definitely lead to a drastic fall.
2. Demand and Supply: A high demand and a low supply eventually always ends up driving prices higher. Since the rate at which bitcoin is generated and its eventual cap at 21 million bitcoins, speculations are that the prices will keep rising.
3. Media Influence: Media hype around bitcoins is on the rise and it has received significant coverage from mainstream media outlets. This has garnered a lot interest and has led to more 3.and more people investing in bitcoins. This has resulted in a drop in supply which in turn has mad bitcoin dearer.
4. Stability of the bitcoin network: Stability of the bitcoin network is a major factor that most bitcoin enthusiasts are concerned about. Most people want a secure network where they will not lose their money. Unlike the conventional currencies like euros and dollars, bitcoins are largely perceived as economic bubbles as they are only valuable when exchanged with other currencies, but do not have any inherent value on their own. If most people and business organizations stopped accepting bitcoins, the “bubble” would burst, leading to a fall in the bitcoin price.
5. Interest from Institutional Investors: A recent Bank of America report attributes the increased value of cryptocurrencies to interest by institutional investors. As financial services companies begin offering cryptocurrencies in custom products, Bank of America predicts that it could affect the “liquidity and market capitalization for such currencies.” European institutions have taken the lead in designing new products using cryptocurrencies. For example, Switzerland’s financial regulation authority has approved a product from Falcon Bank that enables its clients to trade in bitcoin. U.S. banks are following suit. Goldman Sachs is said to be considering bitcoin trading while JP Morgan launched a payment network based on ethereum’s blockchain
6. Panic Selling: However, bitcoins are not widely accepted as a means of transactions or payment, not many people and institutions can accept them. Because most things still have to be paid for in fiat currencies, many businesses often sell large portions of bitcoins so as to pay for their business expenses. This is normally referred to as “dumping” and it can keep the value and price of bitcoins in a depressed state. Based on the amount of bitcoins and the number of companies selling them at any given time, this can cause a “panic sell,” which may send the bitcoin price crashing.
7. Market Manipulation: Traders may purchase huge amounts of bitcoins by creating an artificial demand, jacking up prices before dumping them back in the market making insane amounts of profits from the same. This is one major factor that can affect bitcoin prices.
In conclusion, a diverse number of factors influence the price of bitcoins. Some may be quite sentimental and violent like speculative trade which influences the trading of bitcoin each day, while others can be slow and steady like the gradually rising supply and demand curves. However, the long-term average price of the bitcoin is on the rise and should you choose to invest, understanding the factors can help you to be more comfortable with the price fluctuations and make an informed buying decision. These will probably make the price forecasting more predictable and hence, it makes more sense to spread out your investment over months and not over one transaction. This will hedge you against sudden price drops while ensuring a steady return on your investments.