In recent years, cryptocurrency has increasingly gained prominence in the field of investment, transitioning from an obscure concept to a more widely embraced facet of finance.
Crypto, as described by Forbes, is primarily an encrypted and digital means of transaction. In essence, you exchange money to acquire a unit of cryptocurrency known as a “coin”. Unlike physical currency such as a dollar bill, this form of currency solely exists digitally and is securely encrypted.
Crypto is increasingly being adopted by businesses for buying goods and services, resembling the usage of traditional currency. However, with market volatility and the tendency for certain currencies to rapidly and significantly appreciate, an increasing number of individuals consider crypto as an investment avenue.
Crypto operates more similarly to a stock option rather than traditional currency, given that cryptocurrencies lack a central or governing authority, unlike the stock market. Consequently, although there are possibilities for significant profits, this also leads to increased levels of risk.
How Does Cryptocurrency Work?
Cryptocurrency functions in a similar manner to a combination of traditional money and owning stocks. You have the option to use crypto for purchases at accepting establishments, or to retain it as an investment with the expectation that it will appreciate in worth, similar to other assets.
Investing in cryptocurrency can lead to significant returns. Over the past five years, the value of Bitcoin, the pioneering and widely adopted cryptocurrency, has surged from approximately $1,200 to nearly $70,000. Similar to holding onto a stock option, you could have retained your Bitcoin holdings as they appreciated and later sold them for a profit.
However, the cryptocurrency market has proven itself to be highly volatile where significant fluctuations occur. Bitcoin experienced a surge, reaching a peak of $69,000 in late 2021, followed by a sharp decline to approximately $24,000 by August 2022.
The distinguishing factor of crypto from money or stock lies in its creation and storage method. “Mining” is utilized by certain cryptocurrencies such as Bitcoin. U.S. News & World Report explains mining as the process of solving complex equations with computers. This process not only verifies existing crypto transactions but also generates additional currency.
According to NBC Miami, cryptocurrency is stored in a different manner compared to money or stock options due to the absence of a controlling authority. Storing crypto in an online wallet can pose a security risk as it may be vulnerable to hackers. Alternatively, it can be stored locally and offline, such as on a thumb drive.
Does Cryptocurrency Fit into a Retirement Portfolio?
Although cryptocurrency is currently a significant trend and has the potential for lucrative gains, it may not be suitable for inclusion in a retirement plan.
The most notable feature of cryptocurrency is its volatility, above everything else. In a matter of days, new currencies can experience a meteoric rise before completely vanishing. This holds true even for the oldest and most widely used choices, such as Bitcoin, which are still susceptible to significant fluctuations.
Given the goal of attaining financial security during your later years, it is imperative for your retirement portfolio to be dependable. Therefore, it is more prudent to focus on long-term investments. CNBC suggests considering cryptocurrency as a more suitable option for short-term investments.
Including cryptocurrency as part of your retirement investment strategy also poses a risk due to its inherent nature, as it lacks backing from banks or the government, and lacks a central authority or overseeing figure. Instances of hacking and theft are not uncommon.
Viewed as a positive quality by numerous crypto enthusiasts, this aspect implies that individuals are accountable for the risks involved. Although these risks might appear tolerable in the near future due to the potential profits, they provide additional grounds as to why cryptocurrency may not be a sensible investment choice for a prolonged period of time.
Pros and Cons of Investing in Cryptocurrency
Investing in cryptocurrency, like any other form of investment, has its advantages and disadvantages.
One notable advantage is the potential to earn a significant amount of money. The advantage of a fluctuating market is the possibility of generating substantial profit by correctly timing your investment or identifying a currency that is on the verge of surging.
Additionally, cryptocurrency may appeal to certain individuals as it provides an alternative to engaging with the conventional banking system, which greatly influences the usual American financial landscape.
- Chance to make a lot of money quickly
- An easy alternative to traditional banking
- Lots of inherent risk
- No regulation or central authority
However, there are significant drawbacks to investing in cryptocurrency. Alongside the opportunity for substantial financial gains, there is an inherent risk involved. The tradeoff for accessing a market with great potential for high profits is its susceptibility to extreme losses.
Investing in cryptocurrency carries the risk of both rapid loss and substantial gains. While the absence of traditional banking offers appeal, it also means that the reassuring security and protection provided by a governing authority is lacking in the realm of cryptocurrency investments.
Common Types of Cryptocurrency
Bitcoin, which was established in 2009, is the initial and enduringly favored form of cryptocurrency that gave rise to the ongoing crypto trend. As of August 2022, the value of one Bitcoin was approximately $24,000.
- Bitcoin
- Ethereum
- XRP
- Binance Coin
- Cardano
Although Bitcoin remains superior to the rest of the market, there are several other cryptocurrencies that have gained popularity. Ethereum stands out by offering various services beyond cryptocurrency and contributing to the flourishing NFT industry.
Similar to USD Coin, Tether is another favored choice as it is linked to a conventional currency, aiming to evade the volatile fluctuations commonly witnessed in various other cryptocurrencies.
However, even though a few prominent players control the industry, there is an abundance of options available in the world of crypto, with literally thousands upon thousands of diverse currencies.
How to Invest in Cryptocurrency with Less Risk
Different cryptocurrency investments have varying levels of risk. Certain currencies are more prone to volatility compared to others.
There are indeed certain currencies that have lower overall volatility risks. For instance, USD Coin is a cryptocurrency that is directly linked to the U.S. dollar’s value. It doesn’t involve any mining process and doesn’t experience drastic fluctuations in value. This currency will constantly mirror the dollar’s value.
By making smaller investments and diversifying them among the most historically stable cryptocurrencies, you can choose to invest in the more volatile options with reduced risk. This approach allows you to participate in the industry and potentially profit from its significant fluctuations, while also minimizing your exposure to potential losses.
CNN suggests an alternative approach to investing in cryptocurrency with reduced risk: rather than purchasing crypto directly, opt to invest in companies heavily involved in the crypto market. Numerous publicly traded organizations possess substantial holdings in cryptocurrency. By investing in these companies, you can capitalize on the increasing appeal of digital currency while avoiding the volatility associated with owning it directly.
Want to Retire Early? Include Bitcoin in Your Investment Portfolio
If you had saved $4 for a cup of Starbucks tall coffee and invested it in Bitcoin ten years ago, you would now have an astonishing $688,050. Unbelievable, isn’t it?
Comparing it with: This amounts to a return of 234% on an annual basis.
- stocks (10.5% for the S&P 500 index),
- real estate (3.8% for US median house price) and
- bonds (0.7% for the Vanguard BND Total Bond Market ETF).
Bitcoin’s return orders were significantly higher than those of equities, real estate, and bonds.
If you had invested just one dollar in Bitcoin back in 2010, you could own a house today. And with a hundred dollars, you could comfortably retire at any age.
1. Mathematical — 3rd Bitcoin Halving Bull Run
Bitcoin, just like gold, is in limited supply.
To be precise, there is exactly 21 million of it, which constitutes a limited quantity.
The limited availability of Bitcoin drives its prices to increase. Thus far, we have observed a near-linear rise on a logarithmic scale, indicating an exponential growth in prices. Conversely, traditional asset classes such as bonds, stocks, and real estate generally experience linear price increments. In simpler terms, while other investments enjoy steady growth, the rate at which Bitcoin expands is astonishing.
Similar to gold, bitcoin can also be obtained through mining.
In order to preserve the deflationary nature of Bitcoin and prolong its existence, Satoshi Nakamoto incorporated a provision in Bitcoin’s code dictating that the reward granted to miners is reduced by half after every 210,000 blocks, which amounts to approximately four years. This distinctive characteristic of BTC effectively segments its timeline into distinctive four-year periods.
In history, every halving event has led to a surge in prices known as bull runs, which typically span over a year duration. These recurring events are referred to as post-halving bull runs.
- 1st halving (2012): Bitcoin did a 10X in the post-halving bull run, increasing an order of magnitude from the $100 range to $1200.
- 2nd halving (2016): Bitcoin did a 20X in the post-halving bull run, increasing an order of magnitude from the $1000 range to $20,000.
- 3rd halving (2020): Since the halving in May ($10,000), the price of a BTC has gone up to $15,000 at the time of writing.
We’ve just begun (or will shortly be in) the latest post-halving bull run, projected to last until Q4 2021.
2. Financial — Inflation Hedge in the age of COVID-19
Bitcoin’s reputation as a safe haven reserve asset is another factor contributing to its surge in price.
Central banks worldwide are injecting additional funds into the economy as COVID-19 severely impacts economies. The amount of US dollars printed in 2020 alone accounts for approximately 25% of the total currency in circulation. The G10 countries have already pledged to implement monthly QE measures worth $300 billion in 2021.
As a result of these circumstances, investors are inclined to invest in safe haven assets as a safeguard against inflation and the unpredictable actions of the government. Historically, gold has served as the preferred safe haven, but now Bitcoin has found its place alongside it as a digital equivalent to gold. JPMorgan indicates that older investors usually opt for gold, whereas younger and more technologically-inclined investors tend to choose Bitcoin. The significant disparity arises in Bitcoin outperforming gold by considerable margins.
3. Consumer Behavioural — Mainstream Adoption
Charlie Morris explains that scarcity and inflation-hedging are not the only factors responsible for Bitcoin’s soaring prices. Otherwise, he argues, if we were to abruptly halt gold mining, the price of gold would rise infinitely. Additionally, Bitcoin’s price surge can be attributed to the increasing mainstream adoption by both individuals and institutions.
Bitcoin prices increase due to its widespread adoption as more and more people engage in transactions involving cryptocurrencies, reflecting the growing pervasiveness of these digital assets in our financial landscape. Sylvain Saurel consistently emphasizes that Bitcoin is not just a technology, but a form of money. Consequently, the inevitable consequence of its ascending value is indisputable.
Bitcoin’s intrinsic value ultimately comes from its adoption, acceptance, and usage. Being the first cryptocurrency, BTC had the advantage of being the pioneer. Furthermore, as BTC grew larger, its value increased even more due to the compounding effect of its network.
4. Economic —Record High Demand for Bitcoin
In conclusion, the demand for Bitcoin outweighs the available supply.
- Low Supply: According to Glassnode, 78% of circulating Bitcoin is illiquid, leaving only 4.2 million out of the 18.7 million Bitcoins currently in the system available for buying and selling. Essentially, there are a record number of large and small HODL’ers — BTC owners who, having realised the potential of BTC holdings, refuse to sell. There are also 3–5 million Bitcoins that have been lost forever, due to people losing their keys and so forth. This puts pressure on Bitcoin mining to satisfy our record levels of demand right now.
- High Demand: However, PayPal and Square are buying up over 90% of the 900 newly-mined Bitcoin each day. Moreover, there are only 3 million or so BTC left to mine. Capped at 21 million, the supply is deflationary — there’s less and less left every day. While these fintechs gobble up newly-mined BTC for their millions of customers, an increasing number of large institutions are fighting for circulating BTC for their investment portfolios. Some project a few of the largest S&P 500 companies (e.g. Apple, Microsoft or Tesla) will want to get in on the action in 2021. Adding insult to injury, we’ve seen very little interest from retail investors, unlike the 2017 bull run. All of this can only mean one thing: prices go up!
FAQ about Bitcoin
What is Bitcoin?
The process of recording transactions between two parties in a permanent and verifiable manner without relying on intermediaries such as banks is facilitated by a blockchain, which is a digital ledger. Transactions are grouped and linked using cryptography within blockchains.
is considered as the pioneer in utilizing blockchain technology for commercial purposes worldwide.
- a method of exchange (like cash)
- used as a store of value (like gold)
- speculated upon as a financial instrument (like stocks)
Bitcoin was able to address the well-known issue of double spending by acting as a digital means of transaction.
What’s special about Bitcoin?
To put it briefly, blockchain represents a revolution in technology, while bitcoin signifies a revolution in the realm of finance.
Until now, mankind has never encountered a phenomenon that combines the following three properties, making Bitcoin truly distinct in history:
- digital
- scarce
- decentralised
Bitcoin meets all the criteria as it is both scarce and decentralized, unlike gold which is not digital. Despite being digital, stocks are centralized and may be scarce. Fiat money, on the other hand, is not scarce at all as central banks constantly inject billions into our economies.
From a philosophical standpoint, Bitcoiners are convinced that Bitcoin restores power to the individuals. By allowing governments and central banks to manipulate the supply of money and manipulate its actual worth by freely printing more, they exercise economic dominance over us. Through its decentralization, Bitcoin avoids such manipulation, and its limited availability ensures the preservation of value. Ultimately, this marks a groundbreaking transformation in the realm of currency.
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