Bitcoin didn’t die, but can you still make money on it?
Bitcoin may reach a value of $50,000, but that doesn’t mean it is going to make you rich. As much as I am an advocate of Bitcoin, I don’t think this investment is suitable for the majority of people right now.
If you have friends that already own cryptocurrency, you may feel pressured to follow their example. Every success story of someone becoming a millionaire with Bitcoin makes us feel that we are missing out on the financial party.
As someone who started watching Bitcoin back in 2012, I often regret not buying it when it cost $200 — the same as many people do — but I’m also thankful that I was smart enough not to get involved when the prices spiked. If it makes you feel better, Warren Buffet, Ray Dalio and many other famous investors also didn’t buy Bitcoin or any other cryptocurrencies back in 2012, nor in 2019.
Bitcoin, Buffet and the theory of Intrinsic Value
Why do the world’s greatest financial brains stay away from crypto? Because betting on something in the hope that it will grow over time, without truly knowing what the asset is worth and understanding the market, is gambling, not investing. And gambling is not a way to make money, at least not in the long run.
Many old-school investors rely on the theory of intrinsic value, which means buying assets that have more value than their current market price. For them, cryptocurrencies have no intrinsic value at all, because they are purely digital. Warren Buffet has often called Bitcoin ‘a gambling device’. At the end of 2018, Ray Dalio, the founder of BridgeWater Associates, highlighted that digital currency shall not be considered ‘a storehold of wealth’, primarily because of its volatility. In the opinion of investor, there will be cryptocurrencies owned by governments along with independent coins in the future, but right now cryptos are just ‘the speculative vehicle’.
Bitcoin in the eyes of new age investors
What about modern investors? Let’s look at the opinions of a man who is used to taking higher risks: the venture capitalist. Bill Gurley, number four on the Forbes Midas List, calls Bitcoin ‘an incredible store of value’, especially in countries with unstable local currencies. But despite recognising the huge potential of digital money, the investor didn’t invest a lot of his own capital in this volatile asset. Reportedly, his company Benchmark has invested only a small amount of money in Bitcoin back in 2017.
Mike Novargatz, another well-known Bitcoin advocate, believes that the price of Bitcoin and capitalisation of the crypto market ‘can go a lot further’, but even with this forecast in mind he doesn’t recommend investing more than 1–3% of one’s net worth in crypto assets.
How the crypto market moves
Cryptocurrencies are volatile, because the market capitalisation is extremely small. It may seem that Bitcoin is huge, because everyone is talking about it, but in reality, the total cryptocurrency market cap is less than $200 billion ($185 billion at the time of writing). In comparison, this is close to the Toyota market cap ($175 billion), is 40% less than the capitalisation of Walmart ($303 billion) and is 80% smaller than the Amazon market cap ($945 billion). Let me emphasise here that I’m comparing the whole crypto market with single brands. Volatility does open money-making opportunities for experienced speculators, but the majority of people who buy Bitcoin don’t have this knowledge.
The Bitcoin market is known to be manipulated by ‘whales’: individuals or institutions that own huge amount of coins. According to a recent Chainalysis report, there are around 100 Bitcoin wallets in the world containing over 10,000 BTC each. Because the market is tiny, these people or organisations have enough power to manipulate the prices, causing huge gains or losses for smaller BTC holders. For me, it’s a good reason to stay away from Bitcoin speculative trading.
The threats we should never ignore
But does it make sense as a long-term investment? Well, it could. But as most of the investors highlight, there are serious threats to the crypto market. Firstly, government regulations on digital money are not settled yet, and potential changes can seriously affect the infrastructure. Secondly, there are cases of massive amounts of coins being lost because the exchange owner died, the exchange was hacked or the trading platform did not comply with the law. This clearly illustrates how vulnerable the crypto market is now. And thirdly, Bitcoin is not backed by anything but trust. Take the trust factor away and it will not even be worth $1.
I think Bitcoin is a great tool for transacting and money transfers, especially cross-border ones. Unlike slow and expensive international bank wire transfers, it is extremely cheap and instant. I believe that it is here to stay and that we will see the popularity and volume of these transactions increasing over time. But as this survey by Clovr shows, most people buy cryptocurrencies not because they think it is the future of money, but because they are hoping for huge short term financial returns. If you treat it as a lottery ticket, that is probably OK, but if you are not prepared to lose the money or are betting your last money or a large portion of your capital on it, this is a dangerous move. As with any investment decision, it’s best not to buy following the masses, but carefully asses the risk level and properly research the asset first. That’s why I think Bitcoin investments are not suitable for everyone, including myself.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions