Dubai: Bitcoin, the world’s most well-known cryptocurrency hit a market value of $1 trillion briefly once again this week, a surge that’s helping it outperform return on other traditional assets like stocks and gold by far. Because of its soaring price, Bitcoin may seem like an attractive investment. But is it the right time to buy?
In an investment portfolio, as in life, we all look for certainty (or as much of it as possible) and our mental state is fueled by an obsession to know ‘what’s next’.
Can Bitcoin crash again to below $5,000 (Dh18,364) where it was trading just about a year ago? Will it reach the astronomical price of over $400,000 (Dh1.5 million) that some analysts are predicting it to reach? What are the odds on either of these events?
Frankly, no one has the answers - markets are neither driven by fundamentals (factors that have direct impact on future income streams of the asset) nor by sentiments; it is the irrationality of investors amidst frenzy of irrational markets that prevails, at least in the short term.
That said, it is not easy to ignore an asset that could double your money every three months. So here are few things that investors must consider before investing in Bitcoin:
Bitcoin is extremely volatile.
Investing in Bitcoin is like taking a chance on an unknown 21. At $54,775 (Dh201,186) per coin, the digital currency is up over 86 per cent this year and over 900 per cent higher over the last 12 months. This clearly presents an opportunity for profit to savvy investors, but one could have lost money as easily.
Between 2017 and 2019, for instance, Bitcoin jumped from around $1,000 (Dh3,672) to more than $17,000 (Dh62,440), before it plummeted back to around $3,000 (Dh11,018).
Tesla CEO Elon Musk recently made headlines after announcing that his company bought $1.5 billion (Dh5.51 billion) worth of Bitcoin but volatility and risk in Bitcoin is perceived to be so high that this investment has made even Tesla’s own share price plummet from high of over $900 (Dh3,305) to $673 (Dh2,471) now. If you plan on getting into Bitcoin now, you may want to keep this in mind.
Trading in Bitcoin may have dubious elements.
The way cryptocurrencies work today allows for total anonymity and therefore could be used as an easy channel for funding of possible criminal activities.
Risk of loss or theft of the private key.
Bitcoin is not a physical currency. So technically, you'll never physically possess Bitcoins. It’s a digital currency stored in cryptic format and accessed via a private key (i.e. password or number) which gives you the ability to access your digital wallet and allows you to spend or transfer Bitcoins.
If someone gets your private key, they could transfer the Bitcoins into their digital wallet, and you might not have any way to get your money back. Alternatively, if you happen to forget or lose your private key, there may not be any way to access your money and there is absolutely nothing you can do about it. Bitcoin is an emerging technology, and the knowledge required to securely purchase and store your Bitcoin materially adds to the risk involved.
Bitcoin growth may be unsustainable.
The sustainability of any product or currency depends largely on its widespread adoption. Though Bitcoin and other digital currencies have been around for several years, right now, only around 2,300 US businesses accept Bitcoin as a form of payment, according to research from Fundera. Without widespread adoption, it will be tough for Bitcoin to survive. Although with continuing technology uptake by the humanity, Bitcoin could end up changing the world, but it could just as easily crash and burn.
Bitcoin is not environment-friendly.
Mining cryptocurrencies consume a huge amount of energy. As per the latest study by the University of Cambridge, Bitcoin appears to use far more energy per transaction than all the world's banks put together. The electricity used for Bitcoin produces about 22 megatons of carbondioxide (CO2) annually, that is as much as Kansas City in the US. High energy cost will certainly help in keeping the supply of Bitcoins in check and environment lobbyists will likely rally against the adoption of Bitcoin or other cryptocurrencies in the world.
In conclusion, Bitcoin may be gaining popularity right now, but that alone doesn't make it a smart investment. Before you invest any money, think about your tolerance for risk. If you have money and are willing to risk it, it may be worth the chance. But for most investors, it's best to steer clear of Bitcoin for right now.
Anita Yadav, CEO of Global Credit Advisory Ltd, is a seasoned investment and stock markets expert with experience of two-plus decades. She is currently a strategy advisor to several government and large private institutions in the Middle east.