Examining the Case for Bitcoin Investment
Over the past several years one thing has been on the minds of investors everywhere: is Bitcoin a good investment? This question is complex and requires examining many factors before making an investment in Bitcoin. This is because Bitcoin is a new technology with implications yet unknown by even those who are working on its development.
While many detractors see how much the price of Bitcoin has risen in the past several years, this is not necessarily an indication that investing in Bitcoin at this juncture is a short-sighted decision. In fact, if Bitcoin continues on its growth trajectory, its price is likely to continue seeing significant growth.
Reasons to Invest in Bitcoin
There is a lot to be said for the growth of Bitcoin over the past several years. Every problem which the network has faced has been met with new technology and innovation, and has helped build confidence in the viability of the Bitcoin network. The advancement of Bitcoin technologically has led to more usage of the network than ever before. At the same time, the current bear market in cryptocurrencies could provide the perfect time to buy Bitcoin.
For years there have been questions about the ability for Bitcoin to scale at a level which can handle large transaction volumes. It has been widely noted the Bitcoin network transaction capacity is dwarfed by that of other payment processors such as Visa.
The Lightning Network was created for this exact reason, to help scale the Bitcoin blockchain without compromising the decentralized nature of the network. The Lightning Network is a Layer 2 solution, meaning it is not a part of the blockchain itself, but rather, is built on top of the blockchain.
The Lightning Network allows for microtransactions to be processed via Bitcoin instantaneously and without large processing fees. It operates by bringing together two transacting parties in a multi-signature wallet in which the parties can conduct an unlimited amount of transactions. After all payments are completed, both parties sign-off on the remaining balances and the resulting information is posted to the Bitcoin blockchain. This allows many transactions to be processed off the blockchain itself, but using the chain for underlying security.
More and more businesses are beginning to accept Bitcoin as a form of payment. Large online retailers such as Overstock.com, Expedia, Shopify, and more now accept Bitcoin as a valid form of payment. The more businesses which accept Bitcoin around the world allow users to get more comfortable with this new form of currency and using it on a daily basis.
Political unrest in countries such as Turkey and Venezuela has led to a direct increase in Bitcoin adoption. In fact, it has been reported in a recent survey from ING that Bitcoin adoption in Turkey is the highest in the world. Citizens of these countries are turning toward Bitcoin as a means of storing their wealth which cannot be confiscated by local government or is subject to fiat currency deflation.
Additionally, several countries are even embracing Bitcoin outright. Belarus has put a 0% tax on Bitcoin until 2023, making it a great place to transact freely in Bitcoin. While Canada has over 100 Bitcoin ATMs in place for citizens to freely use throughout the country. It is clear that Bitcoin is being adopted slowly but surely around the world.
Jim Hamel, Portfolio manager at Artisan Global Opportunities Fund, sees digital payments, such as Bitcoin, as the perfect investment as more and more consumers will use these digital payments in the future. Hamel contends:
We’re seeing rapid growth in e-commerce, which requires that customers be able to make secure digital payments. The growth in cross-border transactions and the general impact of an increasingly globalized marketplace are helping accelerate this trend… The move toward digital payments brings more consumers into the formal economy at a time when those payments are becoming faster, more efficient, and ultimately more secure.
Coin Supply and Block Reward
With only 21 million Bitcoin set to ever be minted, it is a race for miners to solve blocks and be rewarded with Bitcoin in return. Over 82% of the total Bitcoin ever available have already been mined, leaving very little Bitcoin remaining.
This provides a significant opportunity for investors. Unlike fiat currency, which has no maximum supply and can be continuously printed, Bitcoin has a fixed supply which will never change. Thus, the laws of supply and demand favor investing in Bitcoin now.
As demand increases, Bitcoin will become more valuable as the supply stays constant. The reward for mining Bitcoin will halve sometime in 2020 from 12.5 BTC to 6.25 BTC, making the time until the block halving a potential bull run for the cryptocurrency. Previous block halving resulted in market price increases as miners worked harder to solve blocks before the reward was halved. Over time, there will be less reward for mining a block, and therefore the new supply of Bitcoin on the market will lessen as well. This supply and demand action in the Bitcoin market makes it a great time to invest in Bitcoin.
A Hedge Against an Economic Recession
Looking at economic cycles, it is likely within the next several years the global economy will experience some sort of recession. In fact, JP Morgan puts the chances of an economic recession in the next two years at 60%. While no one knows how bad this recession will be, when it hits investors are likely to flock to alternative assets in search of a store of value which is not affected by the global economy.
It is likely Bitcoin will see an influx of capital during any such recession due to its decentralized structure which is decoupled from any economy or government. Bitcoin is seen by many as similar to gold, which tends to be a great investment during economic downturns. During the recession of 2008 (and the aftermath that followed), the price of gold soared to all-time highs.
The price of Bitcoin saw a high of close to $20,000 late last year before falling back down to the $6,000 only a few months later. This 70% price decline is nothing new for the cryptocurrency, which has experienced drastic price swings many times over the years.
Each time the price of Bitcoin has dropped more than 70% in the past it has easily recovered. If this trend were to continue, the current price of Bitcoin would be very appealing to potential investors. Current market prices would allow investors to invest in Bitcoin at a price which is much lower than if they had invested late last year.
For investors who believe the strong foundation and technology of Bitcoin, its current price is just another reason why investing in Bitcoin right now could pay benefits in the future.
Why Not to Invest in Bitcoin
The ascent of Bitcoin has gone viral, taking over major news outlets around the world. Yet, most of this news is hype, without significant data and research to back up the rising price of the cryptocurrency. Bitcoin is still in its infancy, and as such, there are many risks which come with using it as an investment tool.
Just like any risky investment, whether it is in a startup or new technology, investors need to take a hard look at the potential pitfalls and red herrings of Bitcoin before considering an investment.
The number one concern around Bitcoin and its viability as an investment is uncertain global regulation. Most government entities have yet to take a firm stance on the status of Bitcoin and how it might be regulated and/or taxed in the future.
Take the United States, where Bitcoin transactions are becoming more prevalent. Bitcoin usage in the United States continues to grow, yet government agencies such as the CFTC and SEC, have continued to provide ambiguous guidance on the status of this cryptocurrency. Is it a currency? A security? Something different entirely? This decision is set to have wide reaching impact on how Bitcoin is regulated, taxed, and governed. This upcoming election cycle could also play a role in the status of Bitcoin, as control of the United States Congress is up for grabs.
In China, the ban on all cryptocurrencies is still in effect. It is unclear when the Chinese government will ease these restrictions and allow Bitcoin to once again operate in the country. Meanwhile in India, the nation’s Supreme Court continues to delay a decision regarding its handling of Bitcoin. Without the world’s two largest countries on-board, it will be difficult for Bitcoin to ever reach adoption on a global scale.
Lightning Network Attack
In March of 2018, there was a successful attack on the Bitcoin Layer 2 solution the Lightning Network. Luckily, this attack was not malicious in nature, and was performed by the anonymous group bitPico in an attempt to stress test the network. The bitPico executed denial of service attack (DoS) attack affected hundreds of nodes on the Lightning Network, ultimately crashing the nodes.
While this friendly attack was not used to manipulate Bitcoin in any way, it displays the vulnerabilities in the Bitcoin network. If bitPico can conduct such an attack, there is no telling what other attacks may be possible in the future. An attack directly to the Bitcoin Lightning Network would spell trouble for its viability as a secure network for its users.
Transactions by Traders, Not Users
When looking at the numbers it appears more and more Bitcoin transactions are being processed daily. However, beneath the sheer numbers it can be seen that most of these transactions are not actually being conducted by Bitcoin users.
During the bull run of last year many experts feared the price of Bitcoin was being supported by activity on unregulated exchanges such as Bitfinex. These exchanges have been known to participate in illegal business practices such as wash trading, a tactic used to increase transaction volume on an exchange, thus making it more appealing to potential traders.
This all goes against the theory that more and more people are actually using Bitcoin for its intended purpose (store of value or global remittances), and instead, trading it as they would any other investment. If this is the case, the global adoption of Bitcoin is not actually growing in any meaningful way, which is a bad sign for this new form of currency.
A Bright Future for Bitcoin
At the end of the day no technology is perfect, especially in the first few years of the world taking notice. There are many problems for the Bitcoin network to work through before it can be used on a global scale. Yet, this is something which shouldn’t be unexpected. The same technological shortcomings were faced by early adopters of the internet and other similar technologies.
Security and scalining solutions will need to be implemented much better than they are currently, and regulators will have to make it clear what Bitcoin is and how it is going to be handled on a government level.
While none of these things are certain to be solved, there is a growing sentiment that Bitcoin will be the currency of the future, and as such, Bitcoin makes for a good investment today.