Is Bitcoin a good investment?

In 2020, we had one question about Bitcoin.

We are less then a week into 2021 and we have already had 8 questions about Bitcoin.

As the price of Bitcoin continues to rise, the media & influencer finance commentators will continue to talk about cryptocurrency.

We have seen the price of Bitcoin surge from $10,514 in January 2020 to $44,903 on 3 January 2021.

With the biggest rise occurring through December 2020, which saw the price skyrocket from $24,000 to $44,000.

What is Bitcoin?

Bitcoin, often described as a cryptocurrency, a virtual currency or a digital currency - is a type of money that is completely virtual.

Bitcoin operates outside the mandate of a central authority (no government or company runs Bitcoin)..

It was created by a person or group of people under the name Satoshi Nakamoto in 2009 and was intended to be used as a method of payment free from government supervision, transfer delays or transactions fees. However, bitcoin is not yet widely accepted for all transactions as some consider them too volatile to be a suitable method of payment.

How does Bitcoin work?

Unlike fiat currencies, bitcoins are not physical objects. Instead, they exist in the virtual world as snippets of code. New bitcoins, or BTC, are created through a process called bitcoin mining, where powerful computers solve complex equations. This process creates a new block on the blockchain where transactions are recorded, verified and saved. Bitcoin miners are rewarded for this service with bitcoins and transaction fees. Part of bitcoins value is created through supply and demand, as there is a limited number of bitcoins to be mined. Once 21 million coins have been mined, we won’t be able to make anymore! This is set to occur sometime in the year 2140

The blockchain

The blockchain is a decentralised, distributed public ledger that records transactions anonymously and securely. By recording all transactions made within the cryptocurrency network, blockchain technology removes the need for a middle-person like a central bank, payment app such as PayPal, or any other central authority. The decentralised nature of blockchain technology means that Bitcoin has no central point of control, as with most traditional currencies, and is sustained by individuals in the widespread cryptocurrency community. This creates a trustless payment system, where parties participating in bitcoin transactions can be sure of the information displayed on the blockchain.

Moreover, the Blockchain prevents any transactions being removed, modified or tampered without permission. This creates a chain of transactions, known as blocks. Without blockchain technology, it would be impossible to use bitcoin.

Simply put, Bitcoin operates for the people by the people. Instead of banks, Bitcoin users visit exchanges

The mining

Mining is the process of attaching new transaction records as blocks to the existing blockchain. Once a block is secured, new units of cryptocurrency known as ‘block rewards’ get credited to the miner. Miners can inject these units directly back into the market. Due to their crucial role in the process, miners can exert ownership of their bitcoin within the blockchain.

How do people get Bitcoin?

There are three main ways people get Bitcoins.

You can buy Bitcoins using 'real' money.
You can sell things and let people pay you with Bitcoins.
Or they can be created using a computer.

Why are Bitcoins valuable?

There are lots of things other than money which we consider valuable like gold and diamonds. The Aztecs used cocoa beans as money!

Bitcoins are valuable because people are willing to exchange them for real goods and services, and even cash.

Supply & demand!

Why people want Bitcoin?

Some people like the fact that Bitcoin is not controlled by the government or banks.

People can also spend their Bitcoins fairly anonymously. Although all transactions are recorded, nobody would know which 'account number' was yours unless you told them.

Furthermore, since cryptocurrency markets began seeing a resurgence, August/September 2020, there have been various instances of ‘big money’ getting in on the action. Examples of this can be seen on various levels, including high profile investors, intelligence firms, hedge funds, and service providers.

Big Money finding Bitcoin

When a hedge fund manager, worth nearly $6 billion USD, makes a move, people notice. So when Paul Tudor Jones announced, in May, that he would be allocating ‘low single-digits’ percentage of the Tudor BVI fund into Bitcoin, crypto enthusiasts understandably got excited. While ‘low single-digits’ may not sound like much, only a few percentage points allocated from a $5 billion fund represents a hearty sum.

“The best profit-maximizing strategy is to own the fastest horse…If I am forced to forecast, my bet is it will be Bitcoin.” – Paul Tudor Jones, CEO of Tudor Investment Corp.

Why are the big investors jumping into Bitcoin?

Inflation. With the seemingly never ending printing of FIAT, many are looking towards safe-haven assets, as a hedge against expected inflation. Bitcoin is not the only asset to benefit from this sentiment – gold and other precious metals are also booming as well.

Other service providers

While PayPal has yet to release official statements surrounding its intentions, it has become increasingly clear that the company is gearing up to launch cryptocurrency services in the near future. Speculation of this first came when the company began hiring cryptocurrency specialists for product development.

In addition to herding talent, multiple sources have shared information with news outlets, indicating an established partnership between Paxos Crypto Brokerage and PayPal – not unlike the recently announced partnership between Paxos Crypto Brokerage and Revolut US. Each of these partnerships would allow for the seamless integration of an API-based service, which allows for the buying and selling of a plethora of cryptocurrencies.

Why are these services providers jumping into Bitcoin?

In its early days, Bitcoin straddled the line between fizzling out and becoming a respected asset. Fast forward to 2020 and if Bitcoin has made one thing clear, it is that it has staying power. We have reached a point in time where there has been enough development and adoption surrounding the sector, that the chances of Bitcoin fizzling out are close to nil.

With this being the case, who better to capitalize on Bitcoin, than an established FinTech service provider? Revolut has adopted it. Square has adopted it. WealthSimple has adopted it. RobinHood has adopted it. If anything, PayPal might be a little late to the party.

Is Bitcoin secure?

Every transaction is recorded publicly so it's very difficult to copy Bitcoins, make fake ones or spend ones you don't own.

It is possible to lose your Bitcoin wallet or delete your Bitcoins and lose them forever. There have also been thefts from websites that let you store your Bitcoins remotely.

The value of Bitcoins has gone up and down over the years since it was created in 2009 and some people don't think it's safe to turn your 'real' money into Bitcoins.

What to do before investing in Bitcoin?

Do your own research
As with any investment or purchase you make, it is recommended that you conduct your own research & due diligence before adding Bitcoin to your personal portfolio.
Read the Bitcoin Whitepaper
Many cryptocurrency experts we have spoken to, outline the Bitcoin Whitepaper as their starting point for their own research before they got started.
Diversify
As with any investment, “don’t put all your eggs in one basket”
Diversification supports investors in reducing their overall investment risk, with assets reacting & performing differently to different events.
Asset Allocation
Supports investors with a system & process to diversify whilst balancing the risk & reward of the portfolio.
Dollar Cost Averaging
Is an investment strategy that aims to reduce the impact of volatility.
This system includes regularly investing a pre-determined amount at a periodic time, into an investment regardless of the price.
Do not invest in something you do not understand
Billionaire investor, Warren Buffett stated “Never invest in a business you cannot understand”
This is similar to investments. Do not invest in investments that you do not understand.

Matthew McCabe, Newcastle Advisors principal advisor, has been researching Bitcoin for the past few years.

It makes up a small proportion of his personal asset allocation, however his main concern still remains that without a central authority of an asset backing the currency, the currency will continue to be subject to volatility as a result of supply & demand.