Millennials: Is Bitcoin A Smart Investment?

Millennials are more likely to invest in Bitcoin and other cryptocurrencies than older generations. A 2022 survey by Investopedia found that 38% of millennials have some kind of cryptocurrency investment, with 60% of those holding digital currencies. However, Bitcoin and other cryptocurrencies are high-risk investments, prone to large price swings and market crashes. So, should millennials invest in Bitcoin?

Bitcoin's extreme volatility

Bitcoin and other cryptocurrencies are known for their extreme volatility. In the last six months of 2024, cryptocurrencies showed an average volatility reading of 63%. This volatility is due in part to the speculative nature of the market, with "savvy" players using bots to artificially inflate coin prices and manipulate the markets.

The price of Bitcoin surged to $20,000 a coin at the end of 2017, but by June 2018, it had fallen to less than $6,000. This kind of volatility can cause serious losses for inexperienced investors. For example, in 2017, Neo, a Chinese alternative to Ethereum, went from $34 to $3.74 in a matter of seconds, causing a flash crash for a number of investors.

The volatile nature of Bitcoin and other cryptocurrencies makes them high-risk investments. While there is the potential for high rewards, there is also the possibility of significant losses. As such, it is generally recommended that investors should not put too much of their money into cryptocurrencies. A common rule of thumb is to keep crypto investments to less than 5% of your total portfolio.

Despite the risks, Bitcoin has a long track record (at least by crypto standards) of creating value for investors. As of June 2024, it accounts for 52% of the entire value of the crypto market. This dominance makes it a relatively lower-risk option compared to other cryptocurrencies, although it is still riskier than more traditional investments.

Due to its volatility, Bitcoin is not suitable as a currency for transactions. Its quick, sudden gains or drops in value make it difficult to use in everyday exchanges. For example, when trying to close a $200,000 deal in Bitcoin, Kevin O'Leary of ABC's "Shark Tank" had to guarantee the value of the Bitcoin against the price of the US dollar because the other party feared the value would fluctuate before the transaction was complete.

In conclusion, while Bitcoin and other cryptocurrencies can be tempting investments, particularly for younger investors, it is essential to understand the risks involved. The extreme volatility of the market can lead to significant losses, and it is generally recommended to keep crypto investments to a small percentage of your total portfolio.

The risks of investing in crypto

Millennials are more likely to invest in cryptocurrency than older generations. However, there are several risks associated with investing in crypto that anyone considering it should be aware of.

Firstly, the unregulated and anonymous nature of digital asset markets, combined with the susceptibility of cryptocurrencies to sentiment, emotion, and publicity, makes prices volatile. Positive and negative news, such as Elon Musk's tweets or the threat of regulation, can have a heavy impact on market prices. This volatility makes it difficult for investors to build confidence and secure gains.

Secondly, there is a high risk of cyber-security issues, including malicious activity and hacking. Trading platforms and third-party service providers may be vulnerable, and if a malicious actor gains control of sufficient consensus nodes on the Bitcoin Network or other means of alteration, then a blockchain may be altered. Additionally, there is a risk of loss or destruction of the private key, which could result in an investor being unable to access their bitcoins.

Thirdly, the lack of regulatory frameworks creates uncertainty for investors. There are concerns about the possibility of future restrictions on cryptocurrencies, as well as inconsistencies among regulators regarding the legal status of digital currencies. This uncertainty also extends to the tax treatment of cryptocurrencies, which varies across jurisdictions.

Another risk to consider is the low market adoption of cryptocurrencies. There are many factors impeding the broad adoption of this new asset class, including regulatory concerns, technology shortfalls, market volatility, and public misunderstandings. There is a chance that cryptocurrencies will never be broadly adopted, leading to a complete loss of value.

Finally, there are security risks associated with storing cryptocurrencies. There have been significant incidents of theft on personal wallets and exchanges, and hacking remains a constant threat. Additionally, investors cannot recover assets that get lost or stolen, and mistaken transactions cannot be reversed. Unlike traditional investments, cryptocurrencies do not have official safeguards or insurance, and rebates on lost investments are dependent on the whim of the organization.

While there are opportunities for investment gains in the crypto market, it is important for potential investors to carefully consider these risks and understand their risk appetite before deciding whether to invest in cryptocurrencies.

Bitcoin vs. stocks and bonds

When considering investment options, individuals often evaluate stocks, bonds, and cryptocurrency. Each of these investment vehicles offers unique features and carries its own set of risks and rewards. This comparison will delve into the characteristics of stocks and bonds in relation to Bitcoin, a prominent cryptocurrency, to provide a comprehensive understanding of these options.

Stocks

Stocks, also known as equities, represent shares of ownership in a company. Investing in stocks entails becoming a partial owner and benefiting from the company's profits through dividends or capital appreciation. One significant advantage of stocks is their potential for higher returns compared to bonds. Historically, the stock market has generated more substantial returns over the long term, enabling investors to significantly grow their wealth. Moreover, stocks provide liquidity, as they can be easily traded on the stock exchange.

However, investing in stocks carries higher risks. Stock prices are influenced by various factors, including company performance, market sentiment, and economic conditions, making them susceptible to greater volatility. This volatility can result in substantial fluctuations in investment value, which may not be suitable for risk-averse individuals. Additionally, investing in individual stocks requires thorough research to select promising companies. As an alternative, investors can opt for mutual funds or exchange-traded funds (ETFs) that offer diversification across various sectors.

Bonds

Bonds are fixed-income securities representing debt obligations issued by corporations, municipalities, or governments to raise capital. When purchasing bonds, investors are essentially lending money to the issuer and receiving periodic interest payments along with the return of the principal amount upon maturity. One key advantage of bonds is the relative stability they offer. Bondholders receive fixed interest payments, providing a steady income stream. Bonds are generally considered less volatile than stocks and cryptocurrencies, making them attractive to risk-averse investors seeking capital preservation.

Bonds also offer flexibility in terms of maturities, ranging from short-term to long-term options. This allows investors to tailor their investments based on specific financial goals and time horizons. Short-term bonds are ideal for those seeking quick returns, while long-term bonds may provide higher yields but lock up funds for an extended period. However, one drawback of bonds is their lower returns compared to stocks and cryptocurrency. Additionally, bondholders face the risk of default if the issuer fails to meet its financial obligations, making it crucial to analyse the issuer's creditworthiness.

Bitcoin

Bitcoin, the most well-known cryptocurrency, operates on blockchain technology, which eliminates the need for intermediaries like banks. It offers a decentralised nature and the potential for high returns, as evidenced by the dramatic price increases in recent years. However, investing in Bitcoin comes with significant risks. The Bitcoin market is highly volatile and prone to sudden price swings, which can lead to substantial gains or losses. The lack of regulation and oversight also makes the cryptocurrency space susceptible to fraud and scams. Another drawback is the limited acceptance of Bitcoin as a medium of exchange, restricting its utility in everyday transactions.

In summary, stocks provide the potential for higher returns but carry greater risks compared to bonds. Bonds offer stability and regular income but tend to have lower returns. Bitcoin, on the other hand, has delivered substantial gains but is characterised by volatility and limited acceptance. Investors should carefully evaluate their risk tolerance and financial goals before allocating their funds into these assets. While Bitcoin has outperformed traditional assets in recent years, its high-risk nature suggests that it should only comprise a small percentage of a well-diversified portfolio.

Bitcoin's legitimacy

Bitcoin and other cryptocurrencies have been the subject of much debate since their inception. While some financial experts advocate for their integration into the financial system, others are sceptical of their legitimacy.

Additionally, the cryptocurrency industry has faced constant skepticism and controversy. American economist Nouriel Roubini, for example, has referred to cryptocurrencies as "the mother of all scams". Berkshire Hathaway's Charlie Munger has also expressed his disapproval, calling Bitcoin "worthless, artificial gold".

Despite the skepticism, Bitcoin has gained popularity, especially among millennials. According to surveys, millennials are more likely to invest in Bitcoin than older generations, with 30% of those in the 18-34 age range preferring to invest in Bitcoin over government bonds or stocks. This interest may be due to their perception of the current economic landscape, as they have inherited a financial system that no longer works for them.

In conclusion, while Bitcoin's legitimacy is questionable due to its volatile nature and constant speculation, it has gained popularity, especially among millennials, and is increasingly being integrated into mainstream financial products.

Bitcoin and retirement

Millennials are the generation most likely to invest in crypto, with 44% saying they have invested in cryptocurrencies. Bitcoin, the world's largest cryptocurrency, is a popular choice for this generation.

Bitcoin and other cryptocurrencies are high-risk investments, with extremely volatile behaviour. They have shown an average volatility reading of 63% in a six-month period. This makes them unsuitable for those with a low-risk appetite, such as those close to retirement.

However, for younger investors, Bitcoin can be a viable option for retirement savings. For example, in a survey by The Motley Fool, it was found that only 29% of Gen Z had a retirement account, but many were investing in cryptocurrencies. As a result, institutional investors are creating financial products for retirement that feature Bitcoin. For example, in 2022, Fidelity Investments announced 401(k) retirement options that included Bitcoin.

Bitcoin is a good starting point for a crypto portfolio as it has a long track record and is seen as a "buy and hold" crypto. It currently accounts for 52% of the entire crypto market, so it should make up at least half of a crypto portfolio.

If you are considering investing in Bitcoin for retirement, it is important to remember that it is a high-risk investment. It is recommended that you only invest money you can afford to lose and that you plan to buy and hold for at least five to ten years to ride out the bull and bear cycles.

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