Is It Too Late To Buy Bitcoin?
This research was sponsored by Luno Global, a platform that allows users to buy, save and manage cryptocurrencies.
Thirteen years ago, a white paper was released that forever altered the financial ecosystem. The now famous Bitcoin: A Peer-to-Peer Electronic Cash System, released with an author name of Satoshi Nakomoto, described a digital currency that could be used to make transactions without a trusted third party.
The Bitcoin network was launched in 2009. In 2010, the coin was valued at $0.10, and a $100 investment would have bought 1,000 units of bitcoin. Per CoinDesk data, that original investment would be now worth approximately $63 million, assuming the assets were held the entire time.
Given these gains, many investors may fear they have missed the majority of bitcoin’s price growth. In fact, throughout history, investors have wondered whether they have missed the boat when an asset is climbing, questioning why they had not bought it sooner.
However, should investors look at more than current prices when considering an asset? While important, fundamentals and future growth prospects should also be considered. What are some of the drivers behind bitcoin prices, what is the current economic landscape, and is it too late to buy the digital currency?
Decentralized
Bitcoin was originally designed to “allow online payments to be sent directly from one party to another without going through a financial institution.” The importance of having a decentralized blockchain is that it provides a record of transactions that is stored across many different nodes, or devices.
This decentralized nature removes a single point of failure. Bitcoin’s blockchain is designed so that no single person or group has full control.
Further, the blockchain is immutable, meaning that once transactions are recorded, they cannot be undone. In addition, this ledger is fully transparent, meaning that interested parties can look at all transactions.
These aspects all combine to help safeguard against fraud and create a trustless network.
Central Bank Landscape
The global asset markets experienced extreme volatility last year, as the S&P 500 fell 34% from mid-February to late March. However, markets quickly switched gears, and the S&P 500 ended 2020 up 16.3%.
The primary driver fueling the recovery in equity prices was the extraordinary amount of stimulus injected into economies by central banks. In addition to the stimulus that governments around the world have provided to their citizens, central banks took an extra step by dropping their benchmark rates to zero or close to that level. Further, they have been purchasing large amounts of government bonds.
However, these asset purchases cannot continue indefinitely, and tapering has already begun in several countries. The U.S. Federal Reserve, which was purchasing $80 billion of Treasury securities and $40 billion of mortgage-backed bonds every month, recently said it would taper these purchases beginning this month.
But the stimulus did not come without a price. In the U.S., consumer spending has ticked higher, due to increasing prices for energy and groceries. The surge in inflation is not limited to the U.S., as the prices for goods and services have increased across the G-20 countries.
Inflation Hedge
As rising prices threaten to reduce purchasing power, investors are again looking at investments that can provide a hedge against inflation. While central banks can continue to print money, bitcoin is often recognized as a deflationary asset, due to its hard cap of 21 million units.
In contrast, the amount of money in circulation in the U.S., as measured by M2, was over $20 trillion at the end of September, up approximately 30% since the beginning of 2020.
There is evidence that inflation has already materialized in many places, and there are concerns that this will only continue.
This growing threat of inflation has motivated many investors, both institutional and retail, to invest in bitcoin.
Growing Adoption of Crypto
This year, a rising number of institutional investors began to adopt crypto, purchasing digital assets as another tool in their diversification toolbox.
One of the coin’s biggest proponents is business intelligence company MicroStrategy. Led by Michael Saylor, who is the company’s chairman & chief executive officer, the firm has consistently added to its bitcoin portfolio, including 9,000 additional coins purchased in the third quarter, bringing total bitcoin holdings to 114,042.
Considering MicroStrategy’s aggressive bitcoin purchasing strategy, owning shares of the firm can be likened to investing in bitcoin. Some of the more significant holders of MicroStrategy include BlackRock Fund Advisors, The Vanguard Group, and Morgan Stanley & Co.
After the Office of the Comptroller of the Currency released a letter allowing banks to custody cryptocurrencies, U.S. Bank, the fifth largest bank in the United States, began to offer a cryptocurrency service to fund managers.
In spite of advancements like this, institutional adoption of crypto is still in its beginning stages. Pension plans held more than $35 trillion worth of assets at the end of last year, according to estimates provided the Organisation for Economic Co-operation and Development (OECD), and they are just beginning their foray into digital assets.
In October, a retirement fund for Houston firefighters announced that it had purchased bitcoin and ether for its defined benefit plan’s portfolio, in what many are considering a watershed moment for the crypto community.
Institutional acclimation is also scaling up, helped by the U.S. Securities and Exchange Commission’s recent decision to approve not one, but two Bitcoin futures exchange-traded funds (ETFs) — the ProShares Bitcoin Strategy ETF, which reached $1 billion in assets in the first two days of trading — and the Valkyrie Bitcoin Strategy ETF.
Innovations
Recent innovations are also helping spur further bitcoin adoption. Cash App allows the purchase of bitcoin with as little as one dollar — in 2020, 3 million people bought or sold the coin through the app, and an additional 1 million in January 2021.
Cash App is owned by Square, and in a recent interview with the Wall Street Journal, chief financial officer Amrita Ahuja spoke about bitcoin’s security and resiliency, and how it would be the strongest contender for a native currency for the internet.
“Bitcoin can provide financial access to those who have historically been marginalized by existing financial systems or who have distrust for their federal banks, as we’ve seen in certain regions, like in Latin America.”
Key Considerations
While there are many reasons to invest in bitcoin, it is important to note that the digital currency has been trading close to all-time highs recently, CoinDesk data shows. As a result, those who are currently thinking about adding some to their portfolio are at risk of buying near the top.
Dollar-Cost Averaging
Fortunately, there is a great strategy called dollar-cost averaging (DCA) that investors can use. This involves making regular purchases, for example once a month or once a week, in order to lower the effect that volatility has on the average purchase price.
By buying bitcoin in incremental units, investors can accumulate the digital currency and also manage its volatility.
Is it Too Late to Buy Bitcoin?
Currently testing new all-time highs, can bitcoin strengthen and continue to rise in value? The perception that it can hedge against inflation, its hard cap of 21 million units, and rising adoption by both institutional and retail investors are just some of the reasons it is not too late to invest in bitcoin.
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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