The price of bitcoin is soaring and so-called cryptocurrencies are getting more attention than ever. Many people have been asking me if it’s a bubble, time to invest, or even both.
First, it helps to have a basic understanding of what we’re talking about. Bitcoin is a novel “virtual” financial asset. Money is backed by governments, but bitcoin is not. Its value is secured by difficult mathematical calculations. The owner of a bitcoin is the person with the correct cryptographic key to unlock the value of the virtual coin.
From a traditional investor’s perspective, bitcoin seems to have no fundamental value. It does not pay interest or dividends and it never will. It conveys no ownership of anything other than itself. At first glance this might imply that bitcoin should be worthless, but I’m not so sure.
The interesting thing about bitcoin is that there is a hard limit on the supply. No matter what, there will never be more than 21 million bitcoins in the world. Long experience has proven the power of supply and demand, and in this case, a firm limit on supply is working to bitcoin’s benefit.
While the supply of bitcoin remains stable, growing public awareness is increasing demand. Even institutional investors are now talking about adding bitcoin to their balance sheets, and that kind of big money might be able to sustain price appreciation for a long time.
It’s not hard to imagine bitcoin’s price continuing to rise, but it can obviously fall a lot too. We’ve already seen big price swings, and that volatility reflects the reality that this is a risky and speculative asset.
So, is bitcoin a good investment? Maybe, but only as part of a diversified portfolio. Nobody really knows what it should be worth, so tread carefully. If you have the risk tolerance, it could add interesting diversification. As with any investment, I don’t putting in any more than you can afford to lose.
I’m not an expert in this area, and it’s always difficult to predict the future. But the traction bitcoin is getting can become a self-fulfilling prophecy. More and more, I’m coming around to the idea that this new financial technology might really have a long-term future. Only time will tell, so I’ll be watching with great interest.