The Wild Ride Of Investing In Bitcoin

Bitcoin is a risky business, but it's also a bit of a laugh. From the wild volatility of the market to the jargon-loving, Lambo-driving crypto crowd, there's a lot to chuckle about. It's like a religion, says billionaire Mark Cuban, and its followers are fanatical. With its own unique language, from HODL to whale, Bitcoin has become an obsession for many, with its own distinct culture and identity. It's a scene, and a pretty funny one at that. From the serious investors to the high-risk, high-reward seekers, the world of Bitcoin is a rollercoaster of thrills and spills, and you might just need a sense of humour to survive it.

Bitcoin as a risky investment

Bitcoin is a risky investment. It's that simple. But if you're still curious about why that is, read on.

Volatility

Bitcoin's price is volatile, and its value can fluctuate wildly. In 2022, it fell more than 75% from its all-time high, and there were drops of 50% or more in 2021 and 2022. While it has seen some impressive highs, it has also experienced dramatic declines.

Irreversible Transactions

Bitcoin transactions are irreversible. If you lose your wallet credentials, your money is gone. People have lost millions of dollars worth of Bitcoin due to this.

Lack of Consumer Protections

Crypto exchanges lack basic consumer protections like insurance from the Securities Investor Protection Corporation and the Federal Deposit Insurance Corporation, which are standard for traditional financial products.

Speculative Nature

Bitcoin's value is based purely on speculation and investor activity, not on underlying fundamentals like stocks. This means its price is unpredictable and can be easily influenced by external factors, such as media coverage or the actions of a few large investors.

Regulatory Risk

The regulatory landscape for Bitcoin and cryptocurrencies is still evolving, and future regulations could positively or negatively impact the value of Bitcoin.

Limited Acceptance

While some big companies like Microsoft, PayPal, and Whole Foods accept Bitcoin, it is far from being a widely accepted form of payment. Its limited acceptance means it may not become a mainstream currency, which could impact its long-term value.

High-Risk, High-Reward

Bitcoin is often likened to gambling or a trip to Vegas. It's a high-risk, high-reward investment. While some people have made fortunes, many others have lost money.

Not a Widely Held View

Bitcoin is still a somewhat subversive concept, and those who invest in it may view themselves as radical or countercultural. It's not an investment that is widely recommended by financial advisors, and many experts believe it is too risky for most people.

In conclusion, Bitcoin is a highly speculative and volatile investment that should be approached with caution. If you choose to invest, it is important to do so as part of a diversified portfolio and only allocate a small percentage of your total portfolio to this risky asset class.

Bitcoin's volatility

Bitcoin is a decentralised digital currency that you can buy, sell and exchange directly, without an intermediary like a bank. Bitcoin is currently the best-known cryptocurrency, and financial media eagerly covers each new dramatic high and stomach-churning decline, making Bitcoin an inescapable part of the landscape.

Bitcoin is also known for its wild volatility. Volatility is defined as the standard deviation of the last 30 days' daily percentage change in BTC price. These numbers are annualised by multiplying them by the square root of 365, as Bitcoin trades all year round.

The volatility of Bitcoin is measured by how much its price fluctuates relative to the average price over a period of time. The cryptocurrency industry thrives on speculation, and crypto investors bet on Bitcoin's price going up or down to make a profit. This causes a sudden increase or decrease in Bitcoin's price, which leads to volatility.

Volatility is a measure of how much the price of a financial asset varies over time. Volatility means that an asset is risky to hold—its value may go up or down substantially on any given day. The more volatile an asset, the more people will want to limit their exposure to it, either by not holding it or by hedging.

Volatility also increases the cost of hedging, which is a major contributor to the price of merchant services. If Bitcoin volatility decreases, the cost of converting into and out of Bitcoin will also decrease.

Bitcoin's forward-looking implied volatility, as measured by traders' pricing of derivatives, has consistently been higher than what is then actually realised. However, the actual volatility has usually been much less than what even market professionals expect. This may be another sign of Bitcoin's volatility being misunderstood and still undergoing a process of discovery.

Historically, low volatility has typically occurred at the end of long bear markets after all the selling has been exhausted and seller energy is low. This is usually when Bitcoin's price bottoms out and begins to increase. It appears that during these times, investors are either apathetic towards the price, demoralised by the price action, or have sold and left the Bitcoin market altogether.

In traditional finance, volatility is synonymous with "risk". Therefore, higher volatility corresponds to higher actual or perceived risk. However, volatility is usually just a statistical measure of dispersion of returns, such as standard deviation. As such, volatility can be either "bad" (measuring negative returns) or "good" (measuring positive returns).

Bitcoin has historically exhibited high volatility or high measures of standard deviation, but when examining its returns, many are disproportionately skewed to the positive side. This is evident in Bitcoin's Sharpe ratio of 0.96 from 2020 to early 2024—meaning while the "risk" in terms of standard deviation is higher, investors have been more than compensated for taking that risk.

Bitcoin has long been seen as a highly volatile asset, but new assets typically take time to undergo price discovery, maturation, and then settle into lower volatility. Even gold experienced high volatility when the US came off the gold standard in the 1970s. In its 15 years of existence, Bitcoin has shown signs of maturation, and it is expected that its volatility will continue to decrease over time.

The psychology of crypto

Bitcoin has become more than just a cryptocurrency; it has become an obsession for many. There are several behavioural and psychological reasons for this. Firstly, bitcoin has become part of an individual's identity. Bitcoin aficionados have their own jargon, acronyms, and phrases, and pre-Covid bitcoin conferences would attract thousands of attendees. The crypto crowd even has a preferred car to buy with their bitcoin: the Lambo (aka Lamborghini). As Finn Breton, professor of science and technology at the University of California Davis, states, "the culture around bitcoin is part of the appeal... When you buy bitcoin, you're actually buying into a whole scene... and it's a scene that can be a part of your identity."

Social media also plays a significant role in the popularity of bitcoin. From celebrities who invest in bitcoin to highly engaged bitcoin communities on Twitter, TikTok, and Reddit, social media platforms fuel interest in bitcoin. Lana Swartz, assistant professor of media studies at the University of Virginia, explains that "suddenly, there's like a new way to see finance and to have an identity of yourself as an actor in like the financial space." Furthermore, research has shown that when individuals discuss their investments in online social environments, they tend to become more risk-seeking in their investment choices.

The volatility of bitcoin is another factor that attracts investors. Checking the price of stocks regularly can be a mundane activity, but with bitcoin, there is constant excitement as the price can vary wildly from one day to the next. Young people, in particular, who have grown up with video games and social media, are conditioned to want instant gratification and fast-paced cycles. Thus, it is not surprising that they are drawn to high-risk, high-reward investments like bitcoin.

Lastly, the excitement around bitcoin, especially among young people, highlights a sense of being "locked out" of traditional wealth-generating opportunities. Millennials, for example, controlled just 4.6% of U.S. wealth through the first half of 2020, according to data from the Federal Reserve. Bitcoin represents a potential new avenue for wealth creation, even if it comes with significant risks.

Bitcoin as a religion

Bitcoin has often been likened to a religion, with its followers exhibiting an almost evangelical fervour. But is it accurate to describe Bitcoin as a religion?

Firstly, let's consider the definition of religion. Merriam-Webster defines it formally as "an organized system of beliefs, ceremonies, and rules used to worship a god or a group of gods". While Bitcoin believers may be fervent, there are no gods or worship in the Bitcoin system. However, the informal definition of religion is "an interest, a belief, or an activity that is very important to a person or group", which may be more applicable.

Belief is a key aspect of religion, and Bitcoin believers certainly have strong beliefs about the power of Bitcoin to transform society. They see it as more than just an investment opportunity; it's a way to separate currency from financial institutions and a new model that can revolutionize how people share value and do business online. This belief in Bitcoin's transformative power goes beyond just financial gain and could be likened to a religious faith.

Another aspect of religion is dogma, or a set of principles established by an authority that is considered incontrovertibly true. In the case of Bitcoin, there is no central authority figure, but there are certain principles that are widely accepted within the Bitcoin community, such as the belief in the superiority of small blocks in the blockchain and the importance of storing Bitcoin off exchanges to maintain sovereignty. These principles could be seen as a form of dogma.

The Bitcoin community also has its prophets and evangelists, such as Satoshi Nakamoto, whose white paper envisioned a "peer-to-peer version of electronic cash" that would bypass financial institutions. Bitcoin believers see Nakamoto as a visionary, and his ideas have inspired a dedicated following.

In conclusion, while Bitcoin may not fit the traditional definition of religion, it does share some key characteristics. The belief, dogma, and evangelism surrounding Bitcoin could be likened to a religious movement. Whether Bitcoin is a religion or not, its impact on society and the passionate community it has spawned are undeniable.

Bitcoin's future

The Bitcoin Believers

Bitcoin has its fair share of supporters who believe in its long-term potential. These enthusiasts see Bitcoin as a store of value and a hedge against market volatility and inflation. With a limited supply of 21 million coins, many expect the price to keep rising over time, especially as more large institutional investors get involved. Bitcoin believers also see it as a viable alternative payment system, especially in developing countries, and predict that blockchain technology will become a bigger part of the economic ecosystem.

The Bitcoin Skeptics

On the other hand, there are skeptics who view Bitcoin as a risky and volatile investment. The cryptocurrency market is known for its wild price swings, and Bitcoin is no exception. Some experts recommend treating it as a "Vegas account", suggesting that it should be a small part of a diverse portfolio. The speculative nature of Bitcoin and the lack of consumer protections on crypto exchanges are often cited as reasons for caution. Even billionaire investor Warren Buffett is not a fan, famously stating that he doesn't believe Bitcoin has any utility.

The Future of Bitcoin

So, what does the future hold for Bitcoin? Well, it's anyone's guess. The approval of Bitcoin ETFs and the growing interest from traditional investors signal a potential shift towards wider adoption. However, it's important to remember that cryptocurrency prices are purely driven by investor activity and sentiment. Bitcoin's value could soar if it continues to gain traction and mainstream acceptance. Conversely, it could also plummet if several crypto platforms fail or there's a mass sell-off. As with any investment, understanding the risks and doing your research is crucial before diving into the world of Bitcoin.

The Bitcoin Culture

Beyond the financial aspects, Bitcoin has also become a cultural phenomenon. It has its own dedicated community, complete with jargon and even a preferred car, the Lamborghini. Investing in Bitcoin becomes part of one's identity, and some see it as a way to participate in a counterculture movement. Social media plays a significant role in driving interest and influencing investment behaviours. The excitement around Bitcoin, especially among young people, highlights a desire to build wealth in a world where traditional assets may seem out of reach.

Frequently asked questions