Dear Dr Per Cap:
Is Bitcoin a Smart Investment? Just a few years ago, a Bitcoin was worth less than $ 10 and now it is trading over $ 50,000.
Dear native of FOMO,
That’s the $ 50,000 question and honestly, I don’t know the answer. Bitcoin mania seems to be taking over the world as more investors, businesses and governments continue to pile up. Is this the currency of the future – or just another over-inflated asset bubble waiting to emerge? Think of the flash in the pan like Beanie Babies or New Coke.
The biggest challenge with investing in Bitcoin is understanding what it is and what it is meant to be. In theory, it is a digital version of cash which, unlike debit cards and other cashless payment systems, is decentralized. This means that it is neither controlled nor regulated by a government.
Bitcoin and other digital currencies or cryptocurrencies really gained interest following the last great financial crisis of 2008. When disillusionment within governments and the financial system, in which currencies can be manipulated and money created through loans and credit, exploded.
It all sounds logical, but that’s not really how Bitcoin actually works. A legitimate currency offers stability and wide acceptance. When Bitcoin has crazy daily price swings of 30% or more, it’s not ideal for someone who wants to use it to buy groceries and pay the light bill. And although more and more companies, such as Tesla and Paypal, are accepting Bitcoin for payments, this is still only a tiny fraction compared to transactions made with good old-fashioned greenbacks.
So what you have is more of a commodity fueled by supply and demand. Lots of people have extra cash to invest because they weren’t spending during lockouts. Take on three rounds of stimulus payments, low interest rates and a wave of optimism from investors who think we’ve finally turned the corner on the pandemic.
It makes people buy Bitcoin faster than miners, people who use computers to verify Bitcoin transactions, put coins into circulation. Thus, the explosion in the price of Bitcoin is probably not fueled by genuine faith in its value as a currency.
But then again, you never know. Ten years from now, we might be using Bitcoin to pay for everything from burgers to homes, so I’m definitely not going to laugh at this as a big joke.
The other day I just heard about a guy working in an Indian country who bought bitcoin for under $ 20. Now he’s done enough to never work another day. However, he is a technician who understands Bitcoin and its risks better than most. He is also better able to manage and protect his digital wallet – software used to access the blockchain, an online database that contains the payment history of every bitcoin in circulation and proof of its owner.
And this is what really scares Bitcoin. For every person who has made a fortune trading or mining Bitcoin, there is a group of people who have lost their line or seen their digital wallet stolen or hacked. And in the absence of a financial institution supporting Bitcoin transactions or regulators overseeing the blockchain, an investor has no recourse for bad things.
I offer the same advice that I give for all high risk and dynamic investments. Do your homework and get more into gambling than investing. Definitely don’t bet more on Bitcoin than you can afford to lose.
Ask Dr. Per Cap is a program funded by the First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information visit www.firstnations.org. To send a question to Dr Per Cap, email [email protected]