Is it worth buying BitCoins?
By: Sheirsh Saxena
Tags: Investors, Bitcoin, Cryptocurrency, Investing, Bitcoin Mining

The recent uptrend in Bitcoin has led to a buying frenzy in the market. No one wants to miss the train. Of course, who would not like to see their money grow that fast! But there is a lot to consider before just jumping in.

One should have a clear idea of what he is buying or investing into. So let us know more about what buying Bitcoin entails. But before that, let us see why do we buy stocks in the first place.

Buying stocks.

Whenever you buy a share of any XYZ company, you become a partial/fractional owner in that particular company or business. A company is generally involved in some business, it might sell products or services, generate some revenue, make profit and loss, and grow over time. So we buy shares of a company hoping it would continue to improve its business, profits and grow as a company, which in turn will reflect in the share price of that company. This is the general idea of what an investor relies upon.

Buying BitCoin.

Ideally, the concept of a cryptocurrency or a virtual currency is meant to be accepted globally. But if we consider Bitcoin as an investment, we are missing the very important aspects of investing in a business. The problem here is that bitcoin has no intrinsic value and by that I mean, it has no inherent value in itself, unlike some businesses which produce something. While not producing something, Bitcoin and other cryptocurrencies are surely consuming something, which is costly electricity, for mining. Mining Bitcoin is a process by which new Bitcoins are created and this involves high computational costs.

So the price of bitcoin is not based on how it grows or performs like a company would, rather it is based on pure speculation. The speculation that its price would go even higher, that people would buy it more, pushing demand high, the speculation that Bitcoin would be the world currency. The general price uptrend is caused due to more buyers and fewer sellers for the same item.

Bitcoin as a Currency!

Now even if we look at Bitcoin from a currency perspective, it can be regarded as the most volatile currency there ever is. If in case you are using Bitcoin as a currency, as a form of exchange, wouldn't you be worried if it changed price every day? One fine day, let's assume a bitcoin is worth 100 dollars, the very next day it could be worth only 50 dollars. So for the time being it cannot really be regarded as a stable currency that is regulated.

Since Bitcoin is a decentralized currency, the value of bitcoin depends on the people who hold it and will increase based on how many people have faith in Bitcoin as opposed to the other fiat currency. So it boils down to the point, that whether people would have more faith in the bitcoin than their own government and currency in the future. Whether Bitcoin succeeds or fails as a currency, is up to the public view and their faith in the currency. But until that, it would remain highly volatile. Why or why not, will it succeed, is highly debatable.

According to Investopedia, as of January 2021, there are more than 4000 cryptocurrencies in existence. On the contrary, there are only around 180 legal currencies in the world, as recognized by the United Nations.

Why the sudden rise though?

Well, the first and foremost reason for a price uptrend is an increase in demand and less supply. The number of Bitcoins that can be mined in total is capped at 21 million, so the supply is definitely limited with around 18.5 million bitcoins already mined.

Now for the demand part, why have people suddenly started buying more and more into bitcoins. The major price appreciation of bitcoin has been since the year 2020. Now, this can be attributed to several factors.

Since the pandemic hit, there was a lot of commotion in the stock market, the stock market dipped and the governments had to print and supply more money to the market to make for losses suffered by the businesses and loss of jobs. For example in the US, the government distributed stimulus checks throughout the country, this also led to fear of inflation in the US. Amidst all this market craziness, Bitcoin seemed like the perfect safe -haven or hedge, since it has no correlation with the traditional currency or stock market.

Secondly, many big institutions have decided to convert their cash into bitcoins as a better store of value. This has increased faith and the interest of people in bitcoin throughout the world.

Another reason is that several companies have started to opt for Bitcoin as a method of payment, this includes PayPal, Venmo, and CashApp.

Many of the applications nowadays, has made buying bitcoin easily accessible to the general public. These apps, combined with price appreciation of bitcoin, social media hype, and FOMO can also be considered as the major contributing factors.

All the above factors have a positive outlook for bitcoin.

When it comes to negative factors, the most important factor would be the country-specific laws and the government's take on bitcoin. Currently, the majority of bitcoins are mined in China, and the banning of crypto coins in several countries has a major effect on the price movement.

Countries banning cryptocurrencies and the restrictions, do send out a negative signal throughout the world, which again, questions the faith in bitcoin as a currency.

Who’s in, Who’s not?

Some of the legendary investors like Warren Buffet, Charlie Munger strongly criticize Bitcoin and cryptos as a whole. Even though people could argue that Warren Buffet and Charlie have always stayed away from technology companies, with Apple being an exception, but then, even Bill Gates is a critic of Bitcoin. Even though, he considers the underlying technology of Bitcoin, which is BlockChain, to be great, but shares the same view as Warren Buffet and other critics when it comes to buying Bitcoin. Another big name, Michael Burry, some of you might know this name from the movie, Big Short, feels Bitcoin is just another speculative bubble.

On the other hand, there are people like Elon Musk, Chamath Palihapitiya, who are quite the advocates of Bitcoin and other cryptocurrencies in general. A cryptocurrency that goes by the name of Dogecoin, has recently seen a massive surge in its price, owing to the tweets of our very own Elon Musk. But just putting in large sums of money because these big people also own it, is probably not the wisest thing. Since people like Elon musk have got a ton of money, and only a portion of their wealth is invested into Bitcoins.

Conclusion

Whether Bitcoin succeeds or not, no one can predict. So, in the end, it all comes down to personal wish and the risk appetite of a person, you can put in the amount that you would not worry about if lost, and ride along as far as it goes, or better, book the profits and get out in time.

Photo by André François McKenzie on Unsplash