Bitcoin as an Investment?

The exchange rate of bitcoin has risen more than 400% over the last year, making one bitcoin worth around 5.000€. Now some claim that bitcoin is a bubble, some have predicted exactly this back then.

At the moment, I am often asked if one should invest in bitcoin. And so that I don’t have to repeat it all the time, I just write my answers down here.

So, is it reasonable to invest in Bitcoin?

There is no guarantee that Bitcoin (or other crypto currencies) will increase in value. If anyone tries to tell you different, he either doesn’t understand the subject or tries to fool you. The value of bitcoin is purely determined by supply and demand. If the demand collapses, its value might go to zero. Everyone should keep that risk in mind. Investing in bitcoin is a bet just like many other investments, for instance like buying normal foreign currencies.

But it is the well-founded bet that the future of currencies is crypto-currencies and that the blockchain technology will change finance and banking similar to the way the internet changed communication and access to information.

The probability of bitcoin’s success is high for the following reasons:

1. Crypto-currencies like bitcoin have many advantages over traditional ways of payment, exchange and storage of wealth. E.g. the transaction fees are very much lower than those of credit card payments and sending bitcoin anywhere in the world can be done in minutes instead of days like normal bank transactions. Customers and businesses can profit from it. More and more online shops are already accepting bitcoin as a method of payment.

2. They are needed and in demand for many applications in international and digital trade. For example, business conducted in bitcoins can avoid currency exchange fees. And micro payments can be automated and be charged anonymously.

3. Whenever there is a financial or government crisis (like recently in India and currently in Venezuela) anywhere in the world, the demand for bitcoin rises. Because it makes you independent of the national money, which can lose its value very fast (and often does in those cases).

4. The amount of bitcoin that can be created is technically limited to 21 Mio bitcoins. This is in the core of the bitcoin protocol and cannot be changed. That is different from traditional currencies. So far 16,531,913 bitcoins have been created. If all bitcoins are created and the demand still rises, the value will go up.

5. It’s a fascinating technology — so the press will keep reporting about it. And therefore, advertise it raising public interest and therefore the demand.

6. International financial institutions have not yet started dealing in bitcoins as an investment tool. But they got interested and started considering it. If they do, the demand for bitcoin will only increase.

7. Bitcoin is by now (in its 9th year of existence) well tested, with many experts looking into it, has lots of supporters and a solid technical infrastructure.

In case you are interested in investing in bitcoin, there are several possibilities how to do that. Some (especially on the internet) are offered with fraudulent intentions — so one needs to be careful and informed.

How I did it

Personally, I have bought bitcoins from other investors for Euro at an exchange. I use Kraken.com (US company with solid credentials but low fees). There are many other exchanges — and also companies, that sell bitcoins directly (usually for a higher fee or at an unfavorable exchange rate).

Before I could “buy” bitcoins there, I had to go through a not simple process of identification. You usually have to invest some time and patience into this and read instructions carefully.

From there I moved the bitcoins into my own local wallet (using a software installed on my own computer). This has the disadvantage, that I am myself responsible for safe backups, security and all that stuff.

But it protects me from hacking, fraud or bankruptcy that might occur at the exchange (this has happened in the past). Those exchanges are not regulated and therefore not as save as the traditional stock exchanges or banks. They are just regular companies.

Some advice on the way

I am aware that this requires some knowledge and effort. Not everyone is able or willing to put that much time into an investment. On the other hand, traditional asset consultants do not or cannot (at least here in Germany) offer any bitcoin investment.

So if you want to take the risk and bet on the future of crypto-currencies, be prepared to work your way into it, be careful and stay informed.

And calm. Take a long perspective. There might be drops in the exchange rate by 1.000 or 2.000 Euro in the short term. There is a lot of short term speculation, day trading and even rumoring about “better” currencies (“coins”) going on and some people fall into panic and sell, increasing the drop. If your opinion about the future of crypto currencies has not changed: Wait it out. Or buy some more. You might never get it that inexpensive again.

Or pay someone you know (NOT someone from the internet!) who does this anyway. And pay him/her fair (you could e.g. share revenues), because he/she will have his/her hands on your bitcoins.

Need professional advice on investing in crypto currenies? Ask e.g. for the BB KISS Investitions-Strategie Service (german language only). But even if you don’t: Make sure not to take advice from anyone, who askes you less questions before he / she recommends you any investment in cryptos.

Carsten Buchholz is economist and IT specialist, working currently for Deutsche Telekom. He blogs about 42 iusses under NeunMalSechs.