The Bitcoin Investment: Missed Opportunities And Lessons Learned

Bitcoin is a highly volatile cryptocurrency, making it a risky investment. Its value is influenced by supply and demand, media coverage, public interest, and government legislation. Despite the risks, Bitcoin has the potential for high returns and has outperformed stocks. If you had invested $1000 in Bitcoin five years ago, it would now be worth over $13,000. However, it's important to remember that past performance does not guarantee future results, and there are risks associated with investing in Bitcoin.

Bitcoin's value and volatility

Bitcoin is a risky investment, and its value is extremely volatile. In November 2021, it hit an all-time high of just under $69,000, but as of August 2024, it's worth around $24,000. That's a huge drop, and it's not uncommon for Bitcoin to fluctuate by thousands of dollars in a single day.

There are several reasons for Bitcoin's volatility:

• Supply and demand: Like most commodities, Bitcoin's price is heavily influenced by how many coins are in circulation and how much people are willing to pay.
• Investor actions: The actions of large investors, known as "Bitcoin whales", can have a significant impact on the market price. If they were to suddenly sell their holdings, it could cause a panic and a sharp drop in prices.
• Media and influencer speculation: News and media outlets often present unverified information and predictions from "experts", which can influence investor concerns and lead to price fluctuations.
• Limited supply and lack of central bank: Bitcoin's limited supply of 21 million coins and its lack of a central bank to control that supply are features that proponents say give it value. However, this also contributes to its volatility.
• Sentiment and speculation: Crypto investors bet on whether Bitcoin's price will go up or down, and this speculation can cause sudden increases or decreases in price.
• Newness: Bitcoin is still very new, and as a young asset, it is still in the price discovery phase, which is the most volatile part of any asset's life cycle.

While Bitcoin has the potential for high returns, it is a risky investment. It is important for investors to carefully consider the risks and be prepared for big downturns.

Supply and demand

The price of Bitcoin is influenced by supply and demand. When there is more demand for Bitcoin, the price goes up, and when there is less demand, the price goes down.

Bitcoin has a finite supply, with a maximum cap of 21 million bitcoin. This limited supply is one of the reasons why the price of Bitcoin is so volatile. As of August 2024, there were 19.74 million bitcoins in circulation. The final coins are projected to be mined in 2140.

The supply of Bitcoin is also affected by Bitcoin halving, which occurs approximately every four years. This is when the number of coins given as a reward for mining a block is cut in half. The last halving took place on April 19, 2024, reducing the block reward to 3.125 bitcoin.

Demand for Bitcoin has increased over time, driven by media coverage, investing experts, and business owners touting its value. It has also become popular in countries with high inflation and devalued currencies, such as Venezuela. Additionally, Bitcoin is used for transferring large sums of money for illicit and illegal activities.

The combination of limited supply and increasing demand has fuelled the rise in the price of Bitcoin. However, it is important to note that Bitcoin's price is still very volatile and subject to significant fluctuations.

The risks of investing in Bitcoin

Bitcoin is the most successful currency today, but there are some serious risks when it comes to investing in it. Here are some of the key risks to consider:

Volatile and fluctuating market

The price of bitcoin is constantly changing, and it's difficult to predict whether you will get a return on your investment. For example, on November 6, 2018, one bitcoin was worth $6,461.01, but just 11 days later, on November 17, the price topped $20,000. This constant rippling back and forth makes it hard for investors to know when to invest and when to sell.

Cyberattacks and hacking

As a technology-based currency, bitcoin is vulnerable to cyberattacks and hacking. There have been many reports of buyers losing their investments on exchanges and mining losses. Additionally, if you have a wallet and forget or misplace your key, it can be difficult or impossible to retrieve your coins.

Fraud

The lack of security in the bitcoin market creates a big risk for investors. The Consumer Finance Protection Bureau and the Securities and Exchange Commission have warned against transactions where unsuspecting investors are duped out of their bitcoins in fraudulent exchanges.

Little or no regulation

Currently, the bitcoin market operates with little to no major regulations. The government doesn't have a clear stance on cryptocurrency, and it's not taxed. This lack of regulation and taxation could lead to problems in the future if bitcoin becomes competition for government currency.

Technology reliance

Bitcoin is entirely reliant on technology. It is digitally mined, exchanged via smart wallet, and kept in check using various systems. Without technology, bitcoin is worthless. This makes bitcoin owners more vulnerable to cyber threats and online fraud.

Block withholding

New bitcoins are created by solving mathematical equations called "blocks." However, a mining pool can use computational power to mine a block and hide it from honest miners, essentially allowing a select few to reap the benefits while others are left with nothing.

In conclusion, while bitcoin may offer the potential for high returns, it is a risky and volatile investment. Investors should carefully consider the risks and diversify their portfolios to reduce overall risk exposure.

Bitcoin's potential as a non-correlated asset

Bitcoin has the potential to be a non-correlated asset, similar to gold. This means that it may not follow the trends of other assets, like stocks. However, while Bitcoin has had moments of non-correlation with the S&P 500 in the last decade, it has yet to prove itself as a truly non-correlated asset.

Bitcoin's correlation with other assets is measured using Pearson's correlation coefficient, a statistical measure that ranges from -1 to +1. A correlation coefficient close to +1 indicates a strong linear positive correlation, meaning the assets typically move in the same direction. A correlation coefficient of zero indicates no relationship, and a -1 reading indicates a strong linear negative correlation (inversely correlated).

Bitcoin has experienced higher positive correlations to other assets over shorter time periods, especially during periods of uncertainty and turbulence. For example, during the COVID-19 pandemic, Bitcoin plummeted in price, seemingly in step with the U.S. stock market. This increase in correlation was likely due to a short-term liquidity crisis that impacted many asset classes.

However, over longer periods of time, Bitcoin has shown little correlation with mainstream financial assets. A report by Fidelity Digital Assets, based on data from 2015 to 2020, concluded that Bitcoin performed differently than mainstream assets, signalling virtually zero correlation to other markets during that time period.

Bitcoin's lack of correlation with other assets could be due to its status as a young, decentralized asset that is not backed by any bank or government. As more people own and transact with Bitcoin, it is possible that its price will become more stable and less correlated with other assets.

The future of Bitcoin

Bitcoin's future remains uncertain, with the potential for both extreme highs and catastrophic lows. On the one hand, Bitcoin has grown in value over time, outperforming stocks, and is considered a compelling long-term investment by some. On the other hand, it is an extremely volatile asset, prone to dramatic price swings, and its future value depends on a variety of factors, including institutional adoption, regulatory changes, and macroeconomic trends.

One of the key factors influencing Bitcoin's future is its decentralized nature, which means it is not backed by any bank or government. This lack of central control is both a strength and a weakness. It has contributed to Bitcoin's volatility but also makes it an attractive alternative to traditional fiat currencies for those seeking a store of value in an economically unstable environment.

Another important consideration is the limited supply of Bitcoin. There can only ever be 21 million bitcoins, and as of 2024, approximately 89% of these are already in circulation. This scarcity is expected to drive up Bitcoin's value over time as demand increases. However, it could also lead to increased volatility and make Bitcoin a target for government regulation or restriction.

The technological advancements and adoption of Bitcoin will also play a crucial role in its future. Improvements in blockchain technology, scalability, security, and privacy features will likely enhance Bitcoin's value proposition and lead to wider adoption. Already, Bitcoin has gained legitimacy through the approval of spot Bitcoin ETFs and the growing interest of institutional investors.

In conclusion, while Bitcoin's future is difficult to predict, it remains a risky investment with high volatility. Its value could increase exponentially, but there is also the possibility of significant downturns, including the risk of it going to zero. Investors should approach Bitcoin with caution, carefully considering the potential risks and rewards before making any decisions.

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