It's everywhere. Bitcoin is the star asset for 2020 and word on the street is that the price of one bitcoin can touch $100,000 by end of 2021.
While that may very well happen, before you jump onto the bitcoin train, try to understand whether you will be riding on an opportunistic trade or a long-term wealth creator.
Without taking away from the practical utility of bitcoin as an alternative currency, one has to determine its value as an asset. Here are three things that make bitcoin more an opportunistic trade than a long-term investment.
1. Lack of economic value
Bitcoin is a currency. It is not a productive asset for the economy. What this means is that the asset itself does not produce any goods or services and has no revenue. Hence, there is no way to ascertain its accurate price on the basis of its output. Price is arrived at on the theory of demand-supply; given that supply is scarce, price is rising.
When investing in an asset for long term wealth creation this can become an issue. You don’t want the value of your investment crashing 50% or more and then taking years to recover.
However, the pace of price rise has been very sharp and given that there is no economic value-added, it’s very difficult to say whether this is sustainable or not. Moreover, if there is a correction, what is a good price to buy again? In the case of assets with revenue generation, one can ascertain expected price but, in this case, it solely depends on the value that users and traders ascribe.
2. Price fluctuation
The price fluctuation in bitcoin has historically been very sharp in short periods of time. This puts your capital at extreme risk without warning. When investing in an asset for long term wealth creation this can become an issue. You don’t want the value of your investment crashing 50% or more and then taking years to recover. The randomness of price movement makes it more a trade than an investment.
3. Inherent risk of redundancy
While the proposition of an alternative currency which is decentralized has a unique appeal given the unending printing of money by large central banks in recent years, bitcoin not only carries with it the risk of being out of favour by shoppers but also the risk of technology evolution. A currency is only as valuable as its users deem it to be.
Despite its increasing acceptance as an asset, its adoption as a currency hasn’t increased as widely. Payment services like VISA, Mastercard and other digital options, continue to remain miles ahead.
In the meantime, there is always the possibility that technology itself evolves and leaves behind what is considered as revolutionary today. If people move on to newer technology and it finds faster acceptance, bitcoins can then potentially lose value permanently.
It is the uncertainty and intangibility of all the stated benefits that bitcoins have which make it unsuitable for your long-term wealth portfolio. If you must ride the roller coaster, then allocate only a small portion of surplus funds which you won’t fret losing completely as well.
Over allocation to bitcoins or other cryptocurrencies can cause you capital risk and a lot of anxiety which is best avoided. For long term investments stick to assets which are revenue generators and those where you can visualize a clear economic value.