Morne Patterson — Is Bitcoin a Good Investment?

Morne Patterson
9 min readMar 14, 2024

As a pioneering digital asset, Bitcoin has captured global attention, drawing in both sceptics and proponents with its potential as a decentralised currency and investment asset to withstand inflation. Its unique nature, powered by blockchain technology, offers a form of payment that operates beyond traditional financial systems and government authorities, raising the question: is Bitcoin a good investment?. The allure of Bitcoin has been bolstered by its impressive performance and the SEC’s recent approval of spot Bitcoin ETFs, which has prompted many to consider its role in their investment portfolios.

Entering the world of cryptocurrency investment requires an understanding of Bitcoin’s characteristic volatility and the risks involved. As such, potential investors must gauge their risk tolerance and financial strategies before engaging with Bitcoin and broader cryptocurrency options. The choices range from buying portions of Bitcoin through exchanges to exploring diverse investment vehicles that cater to varying preferences and approaches to risk.

The Historical Performance of Bitcoin

· Starting at just $0.06 in July 2010, Bitcoin’s price has undergone remarkable growth, reaching $0.10 in October of the same year and then climbing to $0.30 by the end of 2010.

· The following year, Bitcoin peaked at $29.60 in June 2011 but experienced a significant drop, settling at $4.70 by year’s end. Despite such volatility, the long-term trend has been upward, with the price starting at $13.30 in 2013 and skyrocketing to over $1,000 in November, before closing the year at $805.90.

· Bitcoin’s historical performance continued its upward trajectory with notable milestones, such as ending 2016 over $900, surging to $19,345.49 in December 2017, and then witnessing a peak over $10,000 in June of both 2018 and 2019. The year 2020 saw a 416% increase from $6,965.72 to just under $29,000 by December, while 2021 started with a bang as Bitcoin surpassed $40,000 by January 7 and $60,000 by mid-April, reaching its peak of $63,558 in April.

Investors have seen both dramatic rises and significant falls in Bitcoin’s value, with the price falling to $46,164 by mid-December 2022, dropping below $23,000 in June, and reaching below $20,000 by the end of the year. However, in 2023, the price rose again to $42,265 by the end of the year. The approval of Bitcoin Spot ETFs in 2024 led to another price surge, with Bitcoin reaching highs of $69,210 on March 6 and setting an all-time high of $70,184 on March 8, 2024.

The Compound Annual Growth Rate for Bitcoin from August 2011 to December 2023 was a staggering 104.78% with high volatility.

Understanding Bitcoin’s Underlying Technology

Bitcoin operates on a decentralised network, a key aspect that sets it apart from traditional currencies. Understanding its underlying technology is essential for those looking to invest:

· Public Ledger: At the heart of Bitcoin’s infrastructure is the blockchain, a public ledger that records all confirmed transactions. This ledger is secure and tamper-proof, thanks to the cryptographic techniques used in recording transactions.

· Transaction Verification: When a Bitcoin transaction is made, it is signed with a private key, which acts as proof that the transaction came from the owner of the Bitcoin and prevents the transaction from being altered once it has been issued.

· Mining Process: Mining involves a distributed consensus system that confirms transactions, incorporating them into the blockchain. This process ensures that the transactions are in chronological order and that all network participants agree on the system state.

· Distributed Network: The blockchain is stored across a network of computers called nodes, making it incredibly difficult to hack or corrupt. Each node has a complete copy of the blockchain, which is updated with every new, verified transaction.

· Bitcoin Data and Wallets: A Bitcoin is essentially data that denotes ownership. This data is stored in a digital wallet, which is accessed using a public key and private keys. Wallets are a crucial aspect of Bitcoin security, and understanding how to use cold storage methods to protect private keys is vital.

This technology enables Bitcoin to function as a medium of exchange, a unit of account, and a store of value, without the backing of any government entity. Its value comes from the continued willingness of market participants to trade fiat currency for Bitcoin. Despite the existence of over 26,000 types of cryptocurrencies as of July 2023, Bitcoin’s robust technology has helped it maintain its position as the leading digital asset.

Diversification and Risk Management

When considering the incorporation of Bitcoin into an investment portfolio, it’s essential to balance the potential for high returns against the inherent risks. Here are some strategies for diversification and risk management:

· Risk Assessment and Allocation: Before investing, one should assess their risk tolerance and time horizon. It’s advisable to allocate only a small portion of the portfolio to high-risk assets like Bitcoin.

· Diversification Across Crypto Assets: To mitigate risks, diversify across various types of cryptocurrencies. This can include a mix of large-cap coins like Bitcoin and Ethereum, mid and low-cap coins. Consider different sectors within the crypto space, such as utility tokens and governance tokens.

· Alternative Investment Vehicles: For those seeking exposure to the crypto market with potentially lower risk, options include investing in publicly traded cryptocurrency companies, ETFs with crypto or blockchain exposure, and tokenised assets representing ownership in physical or digital goods.

By understanding the characteristics of Bitcoin and other cryptocurrencies, aligning investment decisions with financial objectives, and employing regular portfolio rebalancing, investors can navigate the volatile crypto markets more effectively. Diversification is not just about spreading investments across different assets but also includes considering the industry focus, asset classes, and investment strategies to create a resilient portfolio. Notable investors like Mark Cuban and Elon Musk have adopted personalised approaches to diversification, which may serve as a model for others looking to invest in the crypto space. However, it’s important to maintain a long-term perspective and hedge against market volatility for a more stable investment journey.

Bitcoin vs Traditional Investments

Comparing Bitcoin with traditional investment vehicles highlights several key differences and considerations for investors:

· Volatility and Potential Returns: Bitcoin’s price is highly volatile, influenced by factors such as investor sentiment and regulatory changes, which can lead to substantial gains or losses. In contrast, stocks have demonstrated a long history of steady returns and are backed by the intrinsic value of the companies they represent. However, Bitcoin has shown the potential for higher returns compared to traditional investments like real estate, stocks, and even gold over certain periods.

· Market Dynamics: Stocks are valued based on the performance and potential success of businesses, with prices moving accordingly. Cryptocurrency values, including Bitcoin, are often driven by market speculation and sentiment, which can result in rapid price fluctuations. Unlike stocks, cryptocurrencies are not backed by tangible assets or cash flows, adding to their speculative nature.

· Investment Characteristics: Traditional investments such as bonds, shares, or real estate generate returns through interest, dividends, or capital appreciation and are often perceived as less risky due to stronger regulations and historical performance data. Bitcoin, while offering the possibility of hedge against fiat currency devaluation and outsized gains, carries risks such as cybersecurity threats and regulatory uncertainty.

Investors must weigh these factors against their individual risk tolerance, investment goals, and the composition of their overall portfolio when considering the inclusion of Bitcoin as part of their investment strategy.

Regulatory Landscape and Future Prospects

Bitcoin’s divisive nature is evident as some experts back it as a huge financial breakthrough, while others dismiss it as a fraud. Its journey has been anything but linear, marked by pronounced volatility and the risk of its value plummeting to zero. Despite these risks, regulatory developments have emerged, notably with the SEC’s approval of 11 spot Bitcoin ETFs in January, which marks a significant milestone in cryptocurrency regulation.

The International Monetary Fund’s advocacy for a global regulatory framework underscores the need for standardised regulations to foster market stability, consumer trust, and safe innovation. Additionally, the potential integration of cryptocurrencies into digital wallets in the U.S. hinges on the establishment of a clear legal and taxation system. As central banks, including the U.S. Federal Reserve, explore the creation of central bank digital currencies (CBDCs), there’s a push to combine the benefits of cryptocurrencies with the security of state-backed currencies.

Prior to investing in Bitcoin, it’s important for individuals to comprehend the legal, regulatory, and tax implications specific to their region. The investment landscape for Bitcoin remains subject to volatility and regulatory flux, necessitating a thorough understanding of these factors before proceeding.

How to Start Investing in Bitcoin

Embarking on the journey of investing in Bitcoin begins with a few essential steps designed to ensure a smooth entry into the world of cryptocurrency:

1. Choose a Reliable Exchange or Service:

· Start by selecting a reputable cryptocurrency exchange like Luno, Binance, or Kraken. These platforms facilitate the buying and selling of Bitcoin.

· For convenience, some investors may opt for services like PayPal or mainstream brokerage firms such as Robinhood or Coinbase, which also offer Bitcoin transactions.

2. Set Up a Digital Wallet:

· Secure storage for your Bitcoin is paramount. Choose a digital wallet that offers robust security features like strong passwords and two-factor verification.

· Wallets come in various forms, including hardware (cold storage) and software (hot storage) options, each with its own security considerations.

3. Connect to a Payment Option:

· Link your chosen exchange or service to a payment method such as a bank account, credit card, or PayPal.

· Some exchanges also accept transactions through Bitcoin ATMs for a more direct purchase experience.

4. Place Your Bitcoin Order:

· Decide on the amount of Bitcoin you wish to purchase. It’s advisable to start small, especially if you’re new to cryptocurrency investing.

· Execute your order through the exchange or service, keeping in mind the market’s volatility and the potential for price swings.

5. Implement Security Measures:

· Always use a secure internet connection when conducting transactions to protect your personal and financial information.

· Regularly update your wallet’s security features and back up your wallet to safeguard against potential threats.

6. Manage Your Investment:

· Monitor the market and manage your Bitcoin investment according to your strategy, whether it’s holding for the long term or trading based on short-term volatility.

· Stay informed about market trends, technological developments, and regulatory changes that could impact your investment.

Remember, investing in Bitcoin requires a belief in its long-term prospects and a willingness to endure the inherent price volatility. Conduct thorough research, understand the technology and its use case, and only invest what you’re prepared to lose.

Conclusion

Bitcoin’s journey from a niche digital curiosity to a viable asset considered by many for investment has been remarkable, underlined by its historical performance and the potential of its underlying technology. Balancing these prospects with the inherent volatility and regulatory landscape presents both challenges and opportunities for the modern investor, emphasising the need for a strategic and informed approach to portfolio diversification.

In embracing Bitcoin’s innovative spirit, it’s important for investors to stay well-informed and vigilant, especially in light of the evolving financial regulations. Whether venturing into cryptocurrency for the first time or looking to broaden your investment horizons, consider starting your Bitcoin investment journey. As the financial ecosystem continues to adapt and grow, positioning oneself at the forefront of change could yield unprecedented rewards while reshaping global economies.

FAQs

Q: Can Bitcoin be considered a wise choice for long-term investment?A: Bitcoin has been gaining traction and its popularity continues to rise. However, opinions on its potential as a long-term investment are mixed. For instance, Tesla invested nearly $2 billion in Bitcoin in 2021, showcasing some level of corporate confidence in its future. On the other hand, renowned investor Warren Buffett has expressed skepticism about Bitcoin’s value.

Q: What are the reasons to consider investing in Bitcoin?A: Bitcoin is underpinned by blockchain technology, which bolsters its investment appeal. The technology enables Bitcoin to act as an efficient medium of exchange, with cross-border transactions being completed in approximately 10 minutes at minimal costs. Additionally, Bitcoin’s transaction process is transparent, with all transactions recorded on the blockchain ledger.

Q: What motivates individuals to encourage investment in Bitcoin?A: Bitcoin is highly liquid, making it easy to trade for cash or other assets, such as gold. Its capped supply also poses a lower inflation risk in comparison to fiat currencies. The straightforward nature of Bitcoin trading makes it an attractive option for investors at all levels of expertise.

Q: What stands out as the primary advantage of Bitcoin, and why is it significant?A: The most notable advantage of Bitcoin is the absence of charge-back risks. Transactions made with Bitcoin are irreversible, similar to how cash transactions are final. Once Bitcoin is transferred, it cannot be retrieved unless the recipient chooses to return it. This feature is particularly important for merchants and others who wish to ensure that payments are final.

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Morne Patterson

Morne Patterson is a positive, driven individual and considers himself to have good leadership skills. Visit:- https://mornepatterson.co.za