Is Now The Right Time To Invest In Bitcoin?


Is Now The Right Time To Invest In Bitcoin?

Bitcoin’s meteoric rise this year has captivated the investing world. Is now a good time for you to invest in the skyrocketing cryptocurrency?

Published on 18 December 2017

Bitcoin prices have surged over 2,000% since January. An investor who had the good sense or the luck to buy the cryptocurrency at the beginning of the year would have made a gain that is impossible to replicate in practically any other type of investment.

News about the rapid rate at which bitcoin valuations are shooting up has spread very fast across the world – the cryptocurrency has been grabbing all the headlines in the global financial press recently.

Indeed, bitcoin mania seems to be sweeping the globe. Coinbase, a digital currency exchange headquartered in San Francisco, now has over 13.3 million users. According to Google Trends, which allows you to see how often a particular search-term is entered, the phrase “buy bitcoin with credit card” is at its historic peak as an ever-increasing number of investors are looking to get in on the action.

What is behind bitcoin’s soaring popularity? The simple answer – it’s hard to resist the lure of rising prices:

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Can prices keep shooting up at this rate for much longer? Most experts don’t think so. Financial pundits around the globe are predicting an imminent crash that will leave millions of investors holding worthless bitcoin. Meanwhile, the cryptocurrency’s market cap continues to grow and is approaching US$300 billion.

All of this leaves investors wondering if we are witnessing the next major financial bubble or the birth of a new, revolutionary digital currency, and whether now is a good time to invest in bitcoin.

Digital gold

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Thomas Lee – the managing partner and head of research at Fundstrat Global Advisors, an independent research firm – thinks that bitcoin is the new gold. Lee has impeccable credentials: he was JP Morgan’s chief equity strategist from 2007 to 2014. Prior to that, he was a managing director at Salomon Smith Barney.

According to Lee, the millennial generation trusts bitcoin more than gold. If just 5% of the investment in gold is diverted to bitcoin, the cryptocurrency’s valuation will rise to US$25,000. But it is likely that bitcoin will attract an even greater share than that.

“… 5% seems like an awfully small number. Let’s say it’s 10% or 15%. Then bitcoin could easily be in the US$100,000 range,” Lee said.

Addressing the sceptics who say that bitcoin is a speculative asset, he points out that the mistake is to think of it as a currency. Instead, bitcoin should be viewed as a technology that allows it to be treated as a substitute for gold. In effect, it’s a digital store of value.

Standpoint Research Founder Ronnie Moas is even more bullish than Lee on the prospects of bitcoin, predicting that it will eventually hit US$300,000 to US$400,000 and become “the most valuable currency in the world.”

Bitcoin goes mass market

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Coinbase, the largest US-based bitcoin exchange, has more users than Charles Schwab, a leading brokerage firm. According to the data at the end of October this year, Coinbase had 11.7 million users compared to Charles Schwab’s 10.6 million.

But in the next month, Coinbase added an additional 1.6 million users, an increase of 14% in 30 days. Charles Schwab, in comparison, took a year to increase its user base by 5%.

However, the US is not the world leader in terms of bitcoin trading volume. That distinction belongs to Japan, which represents 58% of the global market. There are 11 licenced bitcoin exchanges in Japan. One of the largest exchanges, bitFlyer, has 800,000 users.

The US market accounts for 27% of bitcoin trading volumes, although this figure is likely to go up with the increase in the number of American account holders.

One of the primary drivers behind the surge in demand around the world for bitcoin and rise in the cryptocurrency’s prices is the launch of bitcoin futures this month on two major global exchanges – Cboe and CME. This development is being hailed by many market analysts as a key step in legitimising bitcoin as it enables institutional investors to trade the digital currency, and could ultimately pave the way for a bitcoin exchange-traded fund.

Not a currency at all

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Most of bitcoin’s proponents consider it to be a currency, much like the US dollar or the British pound. The chief difference, they say, is that it is not a fiat currency – one that is issued by a government. Instead, it is a currency that resides on the internet and which derives its strength from a tamper-proof public computer network.

Bitcoin proponents argue that governments can print or issue any amount of fiat currency, but bitcoin is free from political interference. Consequently, it is more reliable than the US dollar or any other fiat currency.

However, bitcoin critics such as Duncan Carmichael-Jack – a partner at LGT Vestra, a wealth management firm – point out that bitcoin cannot be considered a currency at all. That’s because, in today’s world, you can’t really buy anything with it. It is practically useless except for the fact that you can trade it on an exchange.

This sentiment is echoed by others in the financial services industry including OCBC bank’s vice president of Wealth Management Vasu Menon, who commented: “I don’t see strong fundamental drivers for this bitcoin rally.”

A speculative bubble

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Stephen Roach – Yale University senior fellow and the former Asia chairman and chief economist at Morgan Stanley – thinks that bitcoin is a “dangerous speculative bubble” and a “toxic concept”.

“[Bitcoin will] go down, and the one who’s made the last investment get hurt the most, there’s no question about it,” he explained.

Many analysts compare the rise of bitcoin prices to earlier bubbles in which ordinary investors lost a great deal of money. The dotcom boom of the late 1990s ended with the NASDAQ composite index of technology companies crashing by more than 50%. During that time, Microsoft lost US$240 billion in market cap.

At least many of the tech firms that had astronomical valuations at that time actually provided services that had paying customers. Some of the companies that saw their share prices plunge in 2000 are leading the stock market boom today. But even the strongest supporters of bitcoin would probably have a hard time adequately explaining the benefits that bitcoin provides and why its price is shooting up.

All they can say is that valuations will continue to soar and that if you own any bitcoin, you should continue to “hodl.” The word “hodl” is a deliberately mistyped version of “hold” that is a popular term in the cryptocurrency world. It means that bitcoin owners should resist the temptation to sell when prices rise. Why? Because they will soar even higher.

Indeed, “FOMO” – short for “fear of missing out” – is another popular term in the cryptocurrency world, and a key factor behind investors’ decision put money into bitcoin and “hodl” onto it even as its prices surge to breathtaking highs.

The bottom line

If you haven’t bought any bitcoin yet and you want to enter the market now, you should use only your risk capital – the money that you can safely afford to lose. But bear in mind that the bitcoin market is practically unregulated. You will be putting your money into the “Wild West” of the investment world – and whether bitcoin prices will ultimately collapse or continue to surge is anyone’s guess.