Bitcoin Cash: Late Investment, Late Regret?

Bitcoin Cash is a decentralised digital currency that is free from government or financial institution control. Its value has seen significant highs and lows since its inception in 2009, and it has sparked much debate about the future of finance and money. Despite the uncertainty and volatility, Bitcoin Cash has spawned a global movement and inspired the creation of thousands of other cryptocurrencies. So, is it too late to invest in Bitcoin Cash? Some people believe that it is never too late to invest in Bitcoin Cash, as it is a limited supply digital asset that will likely continue to rise in price over time. Others argue that while it is likely that the price of Bitcoin Cash will continue to increase, there are other cryptocurrencies that offer better growth appreciation, such as small-cap altcoins. It is important to consider factors such as risk tolerance, investment horizon, understanding of cryptocurrency, and diversification before investing in Bitcoin Cash or any other cryptocurrency.

Bitcoin's cyclical history and the crypto winter

Bitcoin's Market Cycle refers to the recurring pattern of price behaviour in the Bitcoin market, characterised by alternating periods of appreciation and depreciation. This cycle is influenced by market sentiment, regulatory changes, technological developments, and the wider economy. Historically, Bitcoin has followed a four-year cycle tied to Bitcoin halving events, which happen approximately every four years. A halving event marks a 50% cut in the Bitcoin reward that miners receive for mining new blocks and verifying transactions. The last halving took place on 19 April 2024, and the next is expected in April 2028.

Bitcoin's cyclical history can be observed through its price history. After being introduced in 2009, Bitcoin's price jumped from its long-held level of $0.10 to $0.20 on 26 October 2010. The cryptocurrency witnessed strong gains in 2013, starting the year at $13 and crossing $100 by April, then $200 by October. It closed the year at $732. In 2017, Bitcoin's price hovered around $1,000 until it broke $2,000 in mid-May and then skyrocketed to close at $19,188 on 16 December 2017.

Bitcoin's price moved sideways in 2018 and 2019, with small bursts of activity. For example, there was a resurgence in price and trading volume in June 2019, with the price surpassing $10,000. However, it fell to a closing price of $6,612 by mid-December. In 2020, the COVID-19 pandemic accelerated Bitcoin's rise, and it closed the year at $28,993, increasing 416% from the start of that year.

Bitcoin's price continued to fluctuate in 2021, surpassing $40,000 by 7 January 2021 and reaching an all-time high of $69,000 in November 2021. However, by mid-December 2021, Bitcoin fell to a close of $46,211 due to uncertainty about inflation and the emergence of a new COVID-19 variant. Between January and May 2022, Bitcoin's price gradually declined, falling further to $29,000 on 11 May 2022. This was the first time since July 2021 that Bitcoin closed under $30,000.

The Crypto Winter of 2022 saw a series of dramatic events, including the failure of multiple stablecoins, such as TerraUSD and Luna, and the collapse of FTX. The overall macroeconomic environment was challenging, with inflation and fears of a potential recession slowing overall activity. As a result, the crypto winter of 2022 saw a 65% year-over-year decline in the global market capitalisation for cryptocurrencies. Bitcoin's price dropped to around $17,000 in December 2022.

However, fortunes changed for Bitcoin in 2023, which saw a stellar rise in its price. It opened the year at $16,530 and ended at $42,258. In January 2024, the SEC was forced by courts to review its denial of certain Bitcoin-related investment products, leading to a market-wide rebalancing. Bitcoin's price climbed quickly after the fund approvals, breaching $60,000 again in late February and early March 2024. It reached an all-time high of $75,830 on 14 March 2024.

The halving events and their impact on supply and demand

Bitcoin halving events have a direct impact on the supply and demand of the cryptocurrency. The halving occurs roughly every four years and involves cutting in half the number of new Bitcoins created and the reward given to miners for validating transactions and adding them to the blockchain. This reduction in supply increases scarcity, fostering a sense of digital rarity that can lead to upward pressure on prices.

The impact of halving events on supply is straightforward. By reducing the number of new Bitcoins entering the market, the halving lowers the available supply. This reduction in supply growth results in lower inflation for Bitcoin. As a result, the network gradually approaches its maximum supply of 21 million Bitcoins, which is expected to be reached by 2140.

The halving events also have a significant impact on demand. Historically, the reduction in supply has led to an increase in demand for Bitcoins. This relationship between supply and demand is a fundamental economic principle. When supply decreases while demand remains the same or increases, it can drive up prices. In the case of Bitcoin, the increased scarcity created by the halving events has contributed to a sense of digital rarity, making people view Bitcoin as something special and rare. This perception of scarcity, combined with the historical increase in demand after previous halving events, has the potential to drive up prices.

Additionally, the anticipation leading up to a halving event often sparks discussions and educational initiatives about Bitcoin, blockchain technology, and cryptocurrency economics, further engaging the community and potentially attracting new investors.

However, it is important to note that the impact of halving events on demand and prices is not guaranteed. While there is a historical correlation between halving events and price increases, it does not imply causation. Various factors, including market sentiment, adoption trends, and macroeconomic conditions, also influence price movements.

In summary, Bitcoin halving events have a direct impact on supply and demand by reducing the number of new Bitcoins and increasing scarcity. This scarcity can lead to upward pressure on prices due to the fundamental economic relationship between supply and demand. However, the impact on prices is not always immediate and can vary depending on market conditions and other factors.

The long-term perspective: decades, not months or years

When considering whether it is too late to invest in Bitcoin, it is important to adopt a long-term perspective. While short-term factors are crucial in investment planning, Bitcoin is a unique asset that rewards investors with time frames of decades, not months or years. This is because the true power of Bitcoin is realised when investors allow the effects of multiple halvings to compound.

Halvings are hardwired into Bitcoin's code and occur roughly every four years. Each time, the number of new tokens that Bitcoin miners receive for verifying transactions is halved, reducing the effective "inflation" rate and preserving its finite nature. With each halving, the longer an investor holds their tokens, the greater the returns as new tokens become harder to create.

Additionally, it is still early in Bitcoin's adoption. Estimates suggest that only around 15% of the world's population has adopted crypto so far. This means that there is still plenty of room for growth in demand for those 21 million coins. Other factors, such as interest from financial institutions, the debasement of fiat currencies, and younger generations' increasing use of cryptocurrency, will also drive demand.

Therefore, from a long-term perspective, it might never be "too late" to buy Bitcoin. The key to success is to adopt a long-term investment horizon, allowing the effects of multiple halvings to compound and reaping the rewards of increased demand for a finite resource.

Risk tolerance and volatility

Factors Influencing Risk Tolerance

Risk tolerance varies from person to person and is influenced by several factors:

• Age and Life Stage: Younger investors generally have a higher risk tolerance due to their longer time horizon before accessing investment funds. As investors approach retirement, their risk tolerance typically decreases as they prioritize capital preservation and stable income.
• Income and Financial Stability: A steady and predictable income stream provides a safety net, allowing investors to allocate more resources to higher-risk, higher-reward assets. Conversely, those with lower or unpredictable incomes may prefer safer investments to preserve capital.
• Life Circumstances and Personal Goals: Significant life events, such as marriage or starting a family, can shift financial priorities towards security and stability, leading to more conservative investment choices. In contrast, receiving an inheritance or financial windfall might increase an investor's willingness to take on more risk.
• Investment Experience: Seasoned investors are usually more comfortable with market volatility and complex investment products. Beginners, on the other hand, may have a lower risk tolerance due to their unfamiliarity with the market and potential losses.
• Psychological Factors: Personality traits play a role in risk tolerance. Naturally risk-averse individuals prefer safer investments, while those with a risk-seeking personality are willing to accept volatility for higher returns. It's important to balance this trait with prudent risk management to avoid excessive losses.
• Economic and Market Conditions: During bull markets, investors may be more inclined to invest in higher-risk assets due to rising stock prices and economic optimism. In contrast, risk tolerance might decrease during bear markets as prices fall and market sentiment becomes pessimistic.

Managing Volatility

Volatility is a key metric for investors and analysts as it helps assess risk and make informed investment decisions. Here are some strategies to manage volatility:

• Diversification: Holding a variety of assets with different risk levels can help offset potential losses during market downturns. For example, adding less volatile assets like bonds to a portfolio that includes stocks can provide a balance.
• Asset Allocation: Diversifying investments across different asset classes, such as stocks, bonds, real estate, and cash equivalents, can further reduce the impact of volatility on a portfolio.
• Financial Advisors: Consulting financial advisors can provide valuable guidance in understanding risk tolerance and making tailored investment choices. They can help investors achieve long-term financial success while navigating market complexities.

Bitcoin Investment and Volatility

When considering investing in Bitcoin, it's important to understand the inherent volatility associated with this cryptocurrency. Bitcoin's value can fluctuate significantly, and investors need to be comfortable with these ups and downs. While some investors view Bitcoin as a sound investment option, particularly in light of traditional markets' instability, others remain cautious due to its volatility.

In conclusion, risk tolerance and volatility are critical factors in investment decision-making. By understanding their risk tolerance and the potential volatility of different investments, investors can make more informed choices that align with their financial goals and comfort levels. Regularly reassessing risk tolerance and adjusting investment strategies is crucial for maintaining a balanced and effective portfolio over time.

Regulatory risks and the evolving landscape

Bitcoin is a decentralised digital currency, free from the control of governments and central banks. However, this lack of regulation and the anonymity it offers have also made it attractive to criminals, with some reports suggesting many buyers lose their investments to fraud.

The regulatory landscape for Bitcoin is varied across the world. Some countries have imposed outright bans, while others have partial bans, prohibiting its use as a means of payment but allowing citizens to trade and invest. In the US, various federal agencies define and treat cryptocurrencies differently. For example, the US Treasury views Bitcoin as a virtual decentralised currency but not as legal tender, while the Internal Revenue Service has defined it as property subject to capital gains tax.

The European Central Bank has classified Bitcoin as a virtual decentralised currency but not as money or currency from a legal perspective. It has advised financial institutions with exposure to crypto assets to implement appropriate risk-management frameworks, and further regulatory measures are being considered.

The evolving regulatory landscape poses a risk to Bitcoin investors. For example, in 2021, China effectively made it illegal for citizens to mine or hold any cryptocurrency. If other countries follow suit, Bitcoin holders could face significant losses.

The lack of a clear regulatory stance from governments and the potential for future restrictions on the use and trading of Bitcoin are key risks for investors to consider. While some countries have embraced the technology, others have expressed concerns about its potential impact on financial stability and its use for illegal activities.

To mitigate these risks, investors should stay informed about regulatory developments in their country or region and consider the potential impact on their Bitcoin investments. Diversification and adhering to the age-old investment advice of only investing what one can afford to lose can also help to minimise the impact of any regulatory changes.

Frequently asked questions