Is it too late to buy Bitcoin?
The price of Bitcoin is volatile. In December 2017, the cryptocurrency’s price came close to $20,000, having been below $5,000 just a couple of months earlier. Throughout 2018, the price has slowly fallen, settling just below $7,000 by early September. Anyone who has waited to invest in Bitcoin might be wondering: is it too late to buy Bitcoin?
The only correct answer is that nobody knows. Some analysts predict that Bitcoin will rise again towards the end of the year, every year. It may even reach greater heights. Bitcoin optimists say that there is plenty of room for values to increase in the coming years and that six-figure prices are not out of the question. Pessimists contend that Bitcoin prices are a bubble that will inevitably burst, and anyone invested in the coin at that time will be left with nothing.
Bitcoin and limited supply
However, as with any investment, there is information that we can consider. Bitcoin, which launched in 2009, is a cryptocurrency, meaning that its transactions are recorded on an immutable blockchain, with each block in the chain being verified by cryptographic calculations. Everyone on the network has access to the blockchain, which is a distributed ledger of transactions, and should therefore be able to detect attempted fraud, such as trying to spend the same digital coins more than once.
The computers on the network that do the verifying are known as ‘miners’. That’s because their reward for verifying each block is a batch of new Bitcoins that they are said to have ‘mined’. The total Bitcoin supply is capped at 21 million. So far, 17 million have been mined and the system is designed to reduce the amount of coins awarded to miners over time, so that it is estimated that the final coins won’t be mined until 2040.
The limited supply of Bitcoins is designed to prevent the kind of currency manipulation where governments or central banks increase the money supply to regulate the economy, causing inflation. Inflation reduces the value of money in circulation. Bitcoin’s system, in contrast, should ensure that Bitcoin retains its value.
Does that make it a good investment? Not necessarily. Land is generally considered a good investment because its supply is limited, and people will always need land to build places to live and work. It’s very hard to live in the developed world and not have to rent or buy land. It’s very easy, at present, to ignore Bitcoin. As it becomes more widespread, Bitcoin’s intrinsic value will increase.
Is Bitcoin a bubble?
That said, it is also clear that there is enough interest in Bitcoin for the price to have risen considerably. Even ignoring the price rise at the end of 2017, someone who bought a single Bitcoin on September 7, 2017, would have paid around $4,600. A year on, that Bitcoin would have been worth around $6,300. That’s a profit of $1,700, which is better than most of the options for investing that money over 12 months.
In between those two Septembers came a period of rapid growth, up to that point of almost $20,000, followed by equally rapid decline. That led some respected figures, such as Alan Greenspan, the former chairman of the US Federal Reserve, and Jamie Dimon, the chief executive of JP Morgan, to warn that Bitcoin and other cryptocurrencies were experiencing a bubble.
The ‘dotcom bubble’ of the early 2000s is a good example: investors saw a few internet companies increasing hugely in value and began chasing any internet stocks they could find. The value of the entire sector increased but only a few companies within it actually had businesses that could make the profits necessary to justify that value. As companies failed, stock prices in the sector collapsed.
Bitcoin shows some signs of a bubble because it’s rising values seem to be driven by people who are buying in for no reason except that they think values will go higher. However, bubbles are tricky for economists to forecast. It can be hard to say when one is happening and it can be equally hard to tell when one has ended. If Bitcoin was experiencing a bubble, did it burst when the price fell from $20,000 back down towards $6,000?
Attitude to risk
More concerning are reports that Bitcoin prices are being manipulated. Academics from the University of Texas examined transactions and concluded that at least half of the price increases last year, for Bitcoin and other cryptocurrencies, were driven by manipulation.
No firm evidence has been found to prove that manipulation is happening, but the researchers said the pricing patterns they found “cannot be explained” by normal investor behaviour. If they are correct, then investors face considerable uncertainty about a possible price crash.
As we said at the beginning, nobody knows if it’s too late to buy Bitcoin. If you believe that Bitcoin has value because of its utility as a digital currency and its limited supply, then it is likely that prices will continue to rise overall, with or without the volatility that we have seen in the past.