Cryptocurrency: Dipping Your Toes In
I didn't buy Bitcoin in 2014, now what?
Welcome to this timely post about last year’s hot topic, Bitcoin. We’re not the biggest fans of jumping on trends here at GYW (read: memestonks), but we think it’s safe to say Bitcoin and cryptocurrencies no longer qualify as a trend - they’re here to stay.
We won’t get into the details of how coins are mined (except to say it’s not the most eco-friendly process!); our goal really is to evaluate Bitcoin and other crypto products from an investment standpoint and to answer the question: should Bitcoin be in your portfolio?
First off, what’s a Bitcoin?
Is Bitcoin just magic internet money that will make me rich? It’s certainly tempting to think of it that way, especially if you bought in early. But even the most bullish Bitcoin investor would be hard-pressed to explain the sixfold rise in valuation we’ve seen in just a few short months.
Cryptocurrencies don’t really work like stocks, or bonds, or even other currencies. In fact, they differ from nearly every other financial instrument out there because by nature they are de-linked from the global banking and economic systems. They’re digital tokens with a finite supply - so central banks and governments can’t just order more of them (like say, the Fed does with U.S. dollars).
The fact that Bitcoin is decentralized and not tied to any one country or company’s economic output is precisely what makes its price so volatile. It’s not like a regular currency that rises and falls in reaction to changes in monetary policy or export volumes. That stuff has nothing to do with crypto!
The closest investment analogy for Bitcoin is probably gold, something that investors treat as a safe haven when all else fails. But again, it’s not really the same as gold, because you can melt gold and make nice shiny earrings out of it. Can’t do that with your Dogecoin! Cryptocurrencies are purely digital stores of value.
So… should I buy some BTC?
Let’s assume the volatility and lack of clear catalysts isn’t an issue. Should you make room in your portfolio for some Bitcoin?
The answer, increasingly, from the professional asset management community is “yes”.
Bitcoin today is not the same beast it was even at the beginning of 2020. Until late last year, it remained a relatively niche concept for much of the world. What changed? Why is Bitcoin now trading closer to $60k than $10k, in just a few short months?
The answer, as it likely is with everything these days, is Covid. The pandemic upended traditional businesses and economies, and save for a few sectors, much of the stock market has been in the doldrums. Ditto for the bond market, with yields about as low they can go as governments try to ramp up stimulus. So where’s a hungry investor to go? Enter crypto.
The crypto movement has been picking up steam for years, but 2021 has really been the tidal wave because institutional investors are finally embracing it. It’s no longer just Reddit roaring kitties mining Doge in their basements - some of the largest asset managers in the world are beginning to add crypto to their portfolios.
But wait! Surely there are red flags?
If that all sounds too good to be true, we agree. As much as we’d love a Bitcoin fairytale and for us all to become BTC kings and queens, it’s not that straightforward.
First off, there’s the often-ignored but very real risks of fraudulent Bitcoin exchanges and lost passwords. Make sure to do your research before actually buying any coin.
Second, much of the current appreciation in Bitcoin can likely be attributed to Covid-weary investors looking for a safe haven. But what happens when normality begins to return? Will Bitcoin go back to being a digital currency you buy stuff with, or will it remain the best investment out there?
The real answer probably lies somewhere in the middle but as with everything crypto, who really knows! The only statement we can really make with confidence is that we’re at the very beginning of the crypto journey. And that’s the crux of why putting all your $$ into Bitcoin or Doge or Ether is not the best idea - it’s fun while it lasts, but it could all come crashing down.
For most of us, crypto is therefore best thought of as a small slice of our portfolios (albeit with great potential). BUT that’s not to imply we aren’t advocates for Bitcoin. Smarter minds than us have embraced it, and if you can make your peace with the crazy volatility, it’s probably not a bad idea to own some. You never know where it will go!
Insightful and well written