Should I Invest In Bitcoin?
I understand that a lot of people would point out the absurdity of asking me if one should invest in Bitcoin. I’ve created a webpage designed to help new users to get into Bitcoin. I’ve talked quite a bit about both what I feel Bitcoin is as well as how I feel Bitcoin can correct certain problems in our current fiat monetary system. One would not be in the wrong to assume that my immediate answer to the question of whether you should invest in Bitcoin would be a resounding “yes!” However, my personal feelings should be set aside and you should take a look at the factors involved before choosing your own answer.
Bitcoin has limited supply. I’ve already gone over why this makes it resistant to inflation. Sure, Bitcoin is inflating at the moment, due to it being created during the mining process. But in the future it will be deflationary. The disparity between the number of Bitcoin created and the number purchased every day makes Bitcoin very volatile right now. But as time goes on and the number of Bitcoin created every day slows, the volatility will drop. Given that the volatility will drop, and the rate of inflation is known and is guaranteed to drop at a known rate, Bitcoin may become a better store of wealth than any currency or commodity known. Another thing that will help reduce volatility is adoption rate. Evidence has shown that increased adoption evens out large price swings.
Every day, Bitcoin is rising in popularity with both businesses, private users, and investors. Businesses see the appeal of cost savings, guaranteed payment, and irreversible payments. Private users see the appeal of peer to peer money with no limits, increased privacy, and unbeatable security. Investors see steadily increasing value. You can see by this chart that the number of transactions is steadily increasing over time. And you can see by this chart that the market capitalization of Bitcoin (market price multiplied by number of coins mined) also continues to rise. As volatile as Bitcoin is from day to day or week to week, it continues to outperform a great number of stocks, bonds, commodities, and currencies in the world. This makes it very attractive to everyone involved. This attraction means increased adoption.
Widespread adoption means higher price which means increased adoption. This effect could continue to snowball. Taking into account the limited supply and continuously decreasing influx of new coins, the price stands a good chance to increase dramatically. If this happens those that buy in now stand a good chance to become the new rich.
Or the whole thing could crash to zero and we all look like fools…
Bitcoin is still an experiment and subject to change. For instance, one of the big battles that Bitcoin is facing at the moment is the size of individual blocks in the Blockchain. As you can see on this chart the size of each block is growing. Bitcoin currently has a hard cap of 1MB per block and they’re filling up rapidly with increased adoption and use. If a block is full transactions may have to wait for the next block to get picked up and recorded. Bitcoin, as a decentralized community, needs to decide how to address this. This is a raging debate with varying solutions offered, accusations of subversion, conflicts of interest, and displays of wrongdoing on both sides. A solution will not come until a fix is offered and a large majority of miners and nodes record blocks using that solution. This is called a fork. It is not a topic I will cover here, nor will I publicly choose a side without doing a lot more research on the subject. I solely wish to use it as an example of how decentralization works.
And this is not the only debate that is going on in the Bitcoin ecosystem. The truth is that Bitcoin may not transition well after some of these changes. One day these changes may go beyond debate and cause fractions in the community. These fractions may heal or they may not. If they do not, Bitcoin could permanently fork and become two coins, each taking a share of the network, the users, and the market cap. This could cause confusion in the markets and business arenas. If this happens one side could eventually become the victor or both could be destroyed. The strength of Bitcoin comes from the strength of the network, which depends on decentralization, which depends on consensus.
But let’s, for the time, presume that Bitcoin remains whole, strong, and continues to grow. One great worry in the Bitcoin world, whether or not anyone admits it, is the fear of hostile government intervention. The loud talkers in the Bitcoin community like to talk about Bitcoin being the Honey Badger of money, how nothing can take it down if it doesn’t want to be taken down. But the truth is that government intervention would scare a large portion of participants away and the whole thing could get shut down. Another possibility is over regulation. Instead of attacking Bitcoin outright they could make it too cumbersome to use for the average person. Taxes in the US, which I will touch on in a future Education post, is a prime example of this. Or it could make it too expensive to use for small businesses. The Bitlicense in New York is an example of this. Yet another possibility is demonization of it in the media. I’ve consistently met people who fear Bitcoin for one reason or another, like believing that hackers use it to extort, or it’s used to fund terrorism, or used primarily for drug money. In another Article I will explain why these claims are preposterous, but know that they are tools being used.
Looking at Bitcoin as it stands today, as of the date of posting, I would have to recommend that everyone own at least a small portion of their savings in Bitcoin. It is a strong investment, outperforming many investments in the world today. It is one of the greatest technological experiments of our age, rivaling the construction of the Internet and I feel privileged to be a part of it. But it is, to be fair, still an experiment and undergoing change that could either strengthen or destroy it. Just because it was first doesn’t mean that it’s best or that it will be the last. So, although I recommend adoption, I also recommend caution. Do not invest more than you can afford to lose and protect your investment with education, security, and diligence.