Bitcoin is Speculative, but that Doesn’t Mean it’s a Bad Investment
All forms of investing involve a level of speculation and risk, even property. And, as Easy Crypto’s Steven Blackburn explains, Bitcoin could be a good move for those with a tolerance for higher risk.
13 February 2024
Since Bitcoin began to circulate as an independent and new class of asset, it has also garnered a reputation for being volatile. At roughly every four years, it experienced cycles of rapid growth followed by sharp declines.
Despite this roller-coaster ride, there is one notable trend — with each bubble, the price of Bitcoin has at least doubled compared to its pre-bubble levels. This consistent pattern has attracted a slew of investors with higher risk tolerance, who saw Bitcoin as a potential vehicle for growing their wealth more quickly than they would otherwise be with traditional assets.
Bitcoin is speculative, but so is everything else
Most people would agree that Bitcoin is a speculative asset. The price volatility in, say the property market, dwarves in comparison to Bitcoin. This leads to the false notion that some investments are not speculative in nature and seem “safer”.
In reality, all forms of investing involve a certain level of speculation and inherent risk, even property. Property is also a rather interesting asset. We’ve heard advice from the older generations that land (property) makes for a prudent investment.
But before you place a down payment for a multi-decade mortgage on any property and call it a good investment, consider this: some empty plots of land outside the city, with no nearby services or public transport, can fetch quite a high price even if no-one can live on it yet. With no buildings built on it, this land doesn’t seem to offer any value to anyone wanting to live or work there. But something has caused its market value to exceed that of its current value (as an unlivable empty lot).
That thing is called speculation — and speculation isn’t the same as gambling. Speculation is a natural tendency for investors to find value in something where people haven’t found value in it yet. Without speculation, no-one would invest. Consider yourself speculating when you are putting money into KiwiSaver — you are speculating that it will grow, due to its history of success as a fund manager and broad governmental support.
In essence, every investment decision involves an element of speculation, even if the investor believes they are making a prudent, “non-speculative” choice. Whether investing in stocks, real estate, commodities or cryptocurrencies, understanding and acknowledging the speculative nature of investing is the first step to making informed financial decisions.
Understand why Bitcoin is valuable now and in the future
All Bitcoin investors speculate on its future price — but on what logical grounds? The primary reason Bitcoin investors think it’s going to be valuable is that Bitcoin is in finite supply, very much like precious metals. It also allows people to transfer value without the need for financial intermediaries, such as a bank.
In essence, Bitcoin is like a digital collectible. Ownership of Bitcoins is enforced through shared copies of cryptographically secured Bitcoin ownership records, akin to the ones that banks have, to record asset ownership of customers.
This Bitcoin ledger is distributed across the world, handled by computers called “nodes”. If one node decides to make false claims on the Bitcoin ownership records, the entire global Bitcoin network can reject it in defence of the true claim. That way, if Bitcoin changes hands, the ownership status changes hands as well, and this is guaranteed to be true, making it a legitimate transaction, even without the oversight of government entities.
That is only from a technological perspective. From an economics perspective, new Bitcoin is programmatically issued roughly every 10 minutes, but there is a catch. Roughly every four years the rate at which it is issued is halved — a mechanism known as halving. This will go on until about the year 2140, when all 21 million Bitcoins have been mined.
This behaviour of Bitcoin, embedded in its core program, mimics the supply rate and availability of precious metals. The more precious metal is mined, the harder it is to discover them under the earth, making them even more rare and valuable. The difference is that we know with 100 per cent certainty about Bitcoin’s future total supply, but the same cannot be the same for gold, silver and other metals.
Right now, 0.01 BTC is worth around $750, and only about a billion people have ever held at least a fraction of that in Bitcoin. Imagine if one more billion people are interested in its technological proposition, and add to the fact that the supply rate wouldn’t be able to keep up with a rise in demand that fast.
Spreading out your Bitcoin investment risks over time
Recognising that Bitcoin is a volatile asset, there is one good approach to investing it. Rather than trying to find the right time to buy and sell Bitcoin, you can apply dollar cost averaging (DCA) to mitigate the impact of market volatility, by spreading out your investments across different market conditions.
The way it works is simple. It’s a strategy that involves regularly investing a fixed amount of money into Bitcoin (and other risk assets), regardless of market conditions. DCA also introduces another important advantage for investors, for beginners and the initiated. It gives them the ability to remove the emotional component from investing decisions. Instead of trying to predict market movements or succumbing to the fear of missing out during periods of market turbulence, investors can adhere to a disciplined investment approach based on predetermined contributions.
Bitcoin is a speculative asset that has experienced significant volatility. However, it has also attracted investors looking for high-risk, high-reward opportunities. It’s important to recognise that all investments involve speculation and inherent risks, including traditional assets like property. It’s therefore misleading to think that speculative assets are bad investments.
Bitcoin’s value is derived from its limited supply and ability to facilitate peer-to-peer transactions without intermediaries. Its supply rate mimics that of precious metals, making it potentially more valuable as demand increases. Recognising Bitcoin’s value, investors can use dollar cost averaging to spread out their investment risks over time, in spite of its price volatility.
Overall, while Bitcoin is speculative, it could still be a good investment for those with a higher risk tolerance.
Disclaimer: Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.