Bitcoin Investment: Worth It Or Not?

Bitcoin is prone to price volatility, with wide swings to the upside and downside. The most recent upswing comes alongside growing institutional demand for the cryptocurrency as an attractive asset class. Bitcoin's value has rallied over the last few quarters, increasing from about $26,000 in mid-September 2023 to an all-time high of around $73,000 in mid-March 2024.

However, Bitcoin is a highly volatile asset, and there is no guarantee that its value will continue to climb. It is also a speculative investment, meaning that people put money into it in the hope that its price will rise rapidly.

Before deciding whether to invest in Bitcoin, it is important to understand both Bitcoin and the wider crypto market. It is also crucial to be aware of the risks involved and to treat Bitcoin as a means of slowly growing your existing wealth rather than an all-or-nothing gamble.

Bitcoin's value is influenced by supply and demand, and its market share is declining

Bitcoin's value is influenced by supply and demand, and its price is determined by the intersection of these forces in the market. Bitcoin's supply is inelastic as it has a fixed supply of 21 million, and its demand is influenced by a variety of factors, including media coverage, investor interest, and safe-haven demand during economic uncertainty.

Bitcoin's market share has been declining over the years. In 2017, Bitcoin maintained a market share of over 80%, but as of 2024, its market share is just over 50%. This decline in market share is due to the emergence of alternative cryptocurrencies, or "altcoins," which have gained popularity and taken away some of Bitcoin's dominance. Despite the decline, Bitcoin remains the dominant force in the cryptocurrency market and is the marker by which many other cryptocurrencies determine their value.

The decline in Bitcoin's market share can be attributed to several factors, including the increasing popularity of altcoins such as Ethereum, which currently accounts for about 16% of the crypto market. Additionally, Bitcoin has faced competition from stablecoins, whose market cap stands at $170 billion with a 7.22% share of the total crypto market cap. The total crypto market cap is over $2 trillion, and Bitcoin's market cap is approximately $1.2 trillion, representing a dominance of around 50%.

The supply and demand for Bitcoin are also influenced by macroeconomic factors and regulatory developments. For example, China's ban on cryptocurrency in 2021 caused a sharp price drop in Bitcoin, and regulatory changes can impact the demand for Bitcoin as a speculative asset.

In summary, Bitcoin's value is influenced by the interplay of supply and demand forces in the market, and its market share has been declining due to the emergence of alternative cryptocurrencies and the evolving regulatory landscape. Despite the decline in market share, Bitcoin remains the dominant player in the cryptocurrency market, and its value continues to be influenced by a variety of economic and regulatory factors.

Bitcoin is a speculative asset, and its price is volatile

Bitcoin's price is prone to wild swings in both directions. For example, in 2022, the price of Bitcoin fell over 60% from its 2021 high of $68,789. In 2023, it rose 63% from $16,000 on January 1 to $27,152. In the same year, it even exceeded $30,000, but it has since retraced its steps. This volatility is driven by several factors, including supply and demand, media coverage, public interest, and government regulation.

Bitcoin's price volatility is also influenced by its speculative nature. As a speculative asset, Bitcoin's value is based on expectations of future price increases rather than any intrinsic characteristics or cash flows. This makes it a risky investment, as its price can be highly unpredictable.

Additionally, Bitcoin's price is supported by U.S. dollar liquidity, and it is not isolated from the traditional banking system. This means that Bitcoin's price can be influenced by Federal Reserve policy and the health of the banking sector. For example, in March 2023, Bitcoin's price rose almost 20% after the Federal Reserve and the Treasury Department announced their support for the banking sector.

While Bitcoin has the potential for significant price increases, it also carries a high level of risk. Investors should carefully consider their risk tolerance and conduct thorough research before investing in Bitcoin or any other cryptocurrency.

Bitcoin's value is influenced by public interest and media coverage

Bitcoin's value is influenced by a combination of supply and demand, media coverage, and public interest. Media coverage and public interest are closely intertwined, with media narratives shaping public sentiment and, in turn, investor behaviour.

The Impact of Media Coverage and Public Interest

Media coverage plays a pivotal role in shaping public opinion and investor sentiment toward Bitcoin investment. Media outlets frame Bitcoin-related stories through narratives that highlight both its potential as a disruptive innovation and its risks and challenges. This framing influences how audiences perceive Bitcoin's role within the financial ecosystem and its impact on conventional markets.

Media coverage also provides a platform for financial analysts, economists, and industry experts to share their opinions and analyses, which can sway public opinion. Positive endorsements or warnings from influential figures can significantly impact investor confidence and market volatility.

Additionally, media reporting on regulatory developments, legislative proposals, and legal disputes related to Bitcoin can shape perceptions of its legality, security, and long-term sustainability. Uncertainty or negative regulatory effects reported in the media may lead to market volatility and investor caution.

Strategies for Investors

Investors need to adopt strategies for informed decision-making and risk management when navigating Bitcoin investment amidst media-driven narratives. Here are some approaches:

• Diversified Information Sources: Rely on a variety of legitimate news sources and media outlets to gather balanced perspectives on Bitcoin. Avoid making investment decisions based solely on sensational headlines or speculative remarks.
• Long-Term Perspective: Maintain a long-term investment horizon when evaluating Bitcoin's potential. Media coverage tends to focus on short-term price movements and regulatory developments, which may obscure the broader technological advancements and adoption trends shaping Bitcoin's future.
• Critical Analysis and Due Diligence: Conduct thorough research and critical evaluations of media reports, distinguishing factual information from opinionated statements and speculation. Verify claims with reliable sources and seek insights from trusted financial advisors or investment experts.
• Risk Management Strategies: Implement risk control techniques, such as diversification across asset classes and portfolio rebalancing, to mitigate potential losses related to market volatility driven by media sentiment.

Bitcoin is a risky investment, and it's important to understand the wider crypto market

Bitcoin is prone to price volatility, with wide swings to the upside and downside. It's also a speculative digital asset with no central governing body to regulate its distribution. These factors make Bitcoin a volatile and somewhat risky investment target.

As of September 2024, the global crypto market cap is $2.19 trillion, a 2.78% decrease over the last day. Bitcoin's dominance is currently 56.45%, an increase of 0.23% over the day.

Bitcoin's value is influenced by five factors:

• Supply and demand: There is a limited supply of Bitcoins, and the rate of production is reduced every four years. This can lead to significant increases in demand, driven by media coverage and investor interest.
• Production costs: Solving a single Bitcoin hash requires immense processing power, and crypto mining uses a lot of electricity. These costs have only a minimal influence on Bitcoin's value.
• Market share: Bitcoin's cryptocurrency market share has sharply declined over the years, falling from over 80% in 2017 to just over 52% currently. However, it remains the dominant force in the market, influencing the value of other cryptocurrencies.
• Government legislation: Bitcoin is impacted by government policies and regulations. For example, China's 2021 ban on cryptocurrency caused a sharp price drop.
• Public interest and media coverage: Bitcoin is influenced by the court of public opinion and can be affected by tweets and comments from high-profile individuals.

Investing in Bitcoin carries several risks:

• Volatility: Bitcoin's value can fluctuate dramatically, making it difficult to predict its future trajectory.
• Cybercrime: Cryptocurrencies are a popular target for cybercriminals, and investors need to prioritize cybersecurity.
• Regulatory uncertainty: The lack of clear regulations around cryptocurrencies can impact their value. For example, the collapse of the FTX exchange in 2022 left investors wary.
• Illicit activities: Bitcoin can be used to support illicit activities, and increasing cybercrime could drive demand.
• Geopolitical and economic uncertainty: Continued uncertainty and instability can impact Bitcoin's value.

Before investing in Bitcoin, it's crucial to understand the risks and conduct thorough research. It's important to treat Bitcoin as a high-risk asset and never invest more than you are willing to lose. Diversifying your portfolio and ignoring the hype surrounding cryptocurrencies can also help mitigate risks.

There are alternative ways to invest in crypto, such as mutual funds, stocks and ETFs

Crypto mutual funds and ETFs are an entirely new way to invest in cryptocurrencies. They are similar in that they can be purchased with your existing investment accounts and are highly regulated. They are also designed to track the price of the underlying assets and have management fees. However, there are some differences between the two. Mutual funds trade once per day, may have investment minimums, and are often actively managed, whereas ETFs trade during normal hours, generally don't have investment minimums, and are mostly passively managed.

There are advantages and disadvantages to crypto mutual funds. They are simpler to buy than actual cryptocurrency, as you can use your existing brokerage account. They can be easily held in a retirement account or other tax-advantaged investment vehicle, and the industry is highly regulated. However, the price performance of a futures-based crypto mutual fund may differ from that of the underlying cryptocurrency, and expense ratios can reduce long-term returns. Liquidity is also limited, as mutual funds trade only once per day, whereas crypto trades 24/7. Finally, when investing in these mutual funds, you don't technically own any cryptocurrencies.

There are also "spot" crypto mutual funds and ETFs, which buy and own the underlying asset, but these are not currently available in the US. Trusts are another option, but they tend to have high fees.

As of early 2022, it was very difficult to get exposure to any coin besides Bitcoin through a mutual fund or ETF. However, there is a massive demand for this type of crypto investment, so more funds are expected to launch in the future.

For now, investors looking to utilize crypto in their investment strategy may wish to buy Bitcoin or Ethereum directly through an exchange such as Gemini, Binance, or Coinbase. Alternatively, investors can buy into a crypto ETF or trust that trades on the public stock market.

Frequently asked questions