Bitcoin (CCC:BTC-USD) is the most widely watched cryptocurrency. With a market-capitalization of over $640 billion, it is also the largest.
So far in 2021, BTC is up about 53%, and hit a record-high earlier in recent days. The latest up move came when Tesla (NASDAQ:TSLA) announced it bought $1.5 billion in Bitcoin. The automaker also “plans to start accepting it as payment for products.”
Following the news, Bitcoin went past $42,ooo and currently is trading at $45,000.
The cryptocurrency market is an alternate asset class. As a young and evolving financial asset, the price of Bitcoin as well as other cryptocurrencies is choppy, especially in the short run. Given increase in price since October, BTC is likely to be volatile in the coming weeks as some investors may decide to take profits.
But I expect Bitcoin to offer significant returns for long-term investors. Here’s why.
Are You New To Cryptocurrencies?
Back in 2009, Bitcoin was regarded more as a concept. Within a decade it has become an asset class followed by millions. If you are just becoming interested in Bitcoin, you may want to know that Bitcoin can be thought of as digital cash. Each Bitcoin is a computer file stored in a digital computer wallet.
Such peer-to-peer (P2P) digital wallets allow you to send money to other people. Many people regard Bitcoin as very safe because every transaction is recorded on blockchain, or a decentralized public ledger. Put another way, no centralized third party like the banking system gets involved in the transaction.
Recent research led by June Ma of the National Bureau of Economic Research in Cambridge, Massachusetts highlights:
Decentralization prevents control of the blockchain by an individual agent making manipulation of the ledger virtually impossible. This relies on ensuring that there are sufficient independent nodes participating that incur the costs of storing and verifying the blockchain.
You can buy Bitcoin using real fiat money, giving a rate of exchange between Bitcoin and U.S. dollars (or other currencies). People can also get a Bitcoin from mining (or creating) it using a computer, when they make their computer available to process transactions over the internet.
These computers are specifically designed to work out complex transactions, or puzzles. Then, the miners are rewarded with a Bitcoin. Over the past decade, many people worldwide set up computers just to mine Bitcoin. This was very profitable in the early days, but not as much any longer.
The total number of Bitcoins that can be mined is capped at 21 million. There are currently about 18.62 million Bitcoins in circulation, leaving less than 2.4 million to be mined. Therefore, the attention has moved from mining to speculating in Bitcoin.
Investors’ Interest In Cryptocurrencies Is Surging
Bitcoin is a highly volatile asset, where it is not uncommon to have daily swings of 10% to 20%. In October, Bitcoin was around $10,400. By Dec. 1, it was shy of $20,000, rising above $19,783 — the previous record it had seen in December 2017. Since then, the cryptocurrency has not looked back.
At present, the short-term swings are mostly higher — in the last four months the price has quadrupled.
Some say Bitcoin is in a bubble, being artificially pumped higher by retail investors. On the other hand, others argue it could become the new digital gold. Currently, with Covid-19, governments are printing money at a rapid rate. Many economists believe this will lead to inflation, eroding the value of fiat money, but not of Bitcoin.
Adding further fuel to the recent rise is the interest by institutional investors. The world’s largest asset fund manager Blackrock (NYSE:BLK) has recently confirmed that it will add bitcoin futures to two of its funds. Big players like this are adding confidence to the crypto market.
Those who watch the cryptocurrency market might also notice that as Bitcoin investors take profits, they tend to move some of their cash to other digital assets. For instance, Ether (CCC:BTC-ETH), the cryptocurrency of the Ethereum network, is over 135% in 2021. It was launched in 2015 as a programmable blockchain.
In early 2016, ETH was around $2.50, the ETH price almost hit $1,100 in January 2018. In March 2020, it plummeted to about $100. Now it’s at more than $1,700.
Putting capital into the highly volatile cryptocurrency market may not appeal to everyone. But it would be important to keep abreast of the developments in the industry.
The Bottom Line on Bitcoin
As Bitcoin remains the poster child for the industry, many investors still feel it is possibly the best cryptocurrency to own. Many also wonder if other companies will follow Tesla and start accepting Bitcoin. Yet, every several weeks, gravity puts pressure on most financial instruments, especially those as volatile as Bitcoin.
Furthermore, there are a few hurdles for Bitcoin. Governments are worried about cryptocurrencies mostly because they can’t control the decentralized nature of it. Many feel that this increases money laundering, making it impossible to track down the source of funds. Seasoned investors, such as Warren Buffett, have been skeptical of its viability.
From my point of view, Bitcoin is here to stay. JP Morgan (NYSE:JPM) feels that by the end of the year it’ll be worth over $100,000 per coin. Other banks and fintech firms are starting to integrate blockchain technology into their own operations, including Monzo, Revolut and PayPal (NASDAQ:PYPL).
Bitcoin will continue to be a hot topic. We can potentially expect some investors in BTC to take part of their paper profits soon. A decline toward $35,000 or below could give potential investors a better entry point.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
