While bitcoin has been at the forefront of the news cycle over the past year, a lack of understanding about how the cryptocurrency actually works and its extreme volatility has kept many traders from considering the industry to be investment-worthy. However, there could still be money to be made. But investors need to be willing to stomach a little risk and wait out the bumps. Here’s a look at the pros and cons of bitcoin.
Pro: Growth Potential
Perhaps the most appealing thing about bitcoin is that the technology is so new that the growth prospects look compelling. Bitcoins offer a new way for people to exchange funds instantly without going through a third party intermediary.
Bitcoin functions on a technology called blockchain, which allows people to transfer assets for just a fraction of the time and money it would take to make the same transaction through traditional financial institutions. For that reason, many have pointed to blockchain as one of the most important technological advances of this decade. Blockchain is useful not just for cryptocurrency transfers, but as a ledger-like technology. And it is applicable to several other industries as well. Everything from the way stocks are traded to how contracts are negotiated could be changed via blockchain.
Bitcoin itself also has a large growth runway as people get more comfortable using it. We’ve already seen everything from Bitcoin ATMs to big-name retailers accepting the cryptocurrency as a valid payment. That’s good news for bitcoin investors. The coins will only become more valuable as the currency catches on and grows in popularity.
Perhaps the biggest con for Bitcoin is the general public’s lack of understanding surrounding the cryptocurrency. Several studies have shown that people — including bitcoin users — don’t really understand how the cryptocurrency works and whether or not it’s secure.
That’s a problem. In order for more people to adopt and become comfortable with bitcoin, they will almost certainly need to understand it. Additionally, the digital currency already has a poor reputation regarding safety, so understanding how to protect and use bitcoins wisely is paramount to it’s expansion.
Another big reason Bitcoin is considered transformative is that the blockchain protects against things like identity theft and payment fraud more thoroughly than a credit-card transaction ever could. As the coins are digital, they can’t be counterfeited. This takes a way some of the risk that traditional transactions carry.
Not only that, but payments via bitcoin are more secure for buyers than credit card charges. Paying via bitcoin allows a buyer to send exactly the amount required — giving the merchant no access to the rest of their funds.
Credit card payments give merchants access to an entire line of credit for any amount. This leaves the door open for hackers and dishonest merchants to pull as much as they want from a buyer’s account.
When discussing the pros and cons of bitcoin, safety falls in both categories.
Bitcoin transactions require just the buyer’s coin wallet ID — rather than their name and contact details. Thus, they offer a degree of anonymity that traditional transactions don’t. While some tout this as a pro for bitcoin, it’s also why some investors view cryptocurrencies negatively.
Many worry that cryptocurrencies are becoming a sort of ‘underworld’ where seedy dealings can take place because this anonymity. That has contributed to consumers’ hesitation to adopt the currency. And it’s given regulators reason to warn against getting involved in bitcoin without fully understanding it.
Investing In Light of the Pros and Cons of Bitcoin
In theory, bitcoin looks like a great opportunity to jump on a new technology before it gains momentum — but in practice things are much murkier. Bitcoin prices have proven to be extremely volatile. And as they don’t offer any of the kind of valuation metrics that stocks do, it’s difficult to estimate where prices are going. Analysts are all over the shop with bitcoin 2018 predictions, making it difficult to gauge where the cryptocurrency is heading.
There are plenty of other ways to add cryptocurrencies to your portfolio without owning them outright though. The closest you can get without buying them would be through an investment like the Bitcoin Investment Trust (OTCMKTS:GBTC). The trust behaves similarly to an ETF by buying and holding on to bitcoins. That means investors who buy shares will benefit should bitcoin prices rise. Investors can also purchase futures contracts to bet on bitcoin prices.
However, perhaps the safest way to add bitcoin to your investment strategy is to choose a publicly traded company that has been making bets in the cryptocurrency space.
Overstock.com Inc (NASDAQ:OSTK) is the most notable example, the company has been shedding its traditional e-commerce business to become completely reliant on the cryptocurrency industry. If you’re looking for something even safer, consider a company like IBM (NYSE:IBM) which has been working to develop new uses for blockchain or NVIDIA Corporation (NASDAQ:NVDA) which makes chips used by bitcoin miners.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.