Should I invest in bitcoin tokens?

Disclaimer: The writer is not an investment advisor and it is not his intention to provide investment advice. Please consult one of the many qualified investment advisors worldwide for advice on your investment choices.

IN PART one, we mentioned that one bitcoin token can easily be divided in a million parts, called satoshies. This should actually say 100 million parts. Thanks to a sharp eyed reader for the catch.

That said, this is part two of our bitcoin educational series. If you never read part one, it would be extremely helpful to read it before proceeding.

A long time ago, a product manager told me that when the question is complex, the answer is always “it depends”. The bitcoin investment question is a complex one and so the answer is “it depends”.

Let us look at what is meant by investment. Generally, investment is the act of forgoing the current use of a resource with the expectation that that resource will be of greater value in the future. The expectation of increase in value is a very important feature of investment in contrast to savings where there’s little expectation of increase in value, for example, putting money under your bed or joining a partner. In both cases you forgo the use of the money, but when you retrieve it the value would not have increased. The act of saving with an expectation of increase in value is what we call investment, you are forgoing the use of those funds with the hope that whatever you invested it in would have caused its value to increase.

That said, people will simultaneously have multiple reasons to invest. One could invest to buy a house, send the children to college, in a pension plan or for a well-coveted vacation. All these investments could be conducted at the same time. These could be broken down into long-, medium- and short-term investment.

To get back to the question, are bitcoin tokens suitable for investment? In my opinion, it would depend on the type and purpose of the investment. This graph is a graphical representation of the historical growth in value of the bitcoin token since 2010.

If you are a long-term investor who could have purchased US$1000 in tokens from 2010 or even 2014, you would have to agree that that investment would have been a great investment if your intention was to leave the funds in place for 10-15 years. Of course, many have made millions if not billions of dollars because they had both the insight and patience to invest for the long term in bitcoin tokens.

Quite frankly, some just bought some tokens and only remembered them when the price went crazy. So much so that some people have thrown them out in the garbage because they forgot they had them. Though not at the same growth rate other products like Tesla, Netflix, Google and Apple shares had similar success profiles over the last 15 years. Therefore, the investment strategy of a long-term investor could be the same whether they invested in bitcoin tokens or stocks they buy and hold for the long term.

For medium- and short-term investors, investments in companies’ stocks can be a roller coaster ride and unless you are an exceptional professional, you won’t see the coming of the rise-and-falls resulting in major losses.

Bitcoin tokens on the other hand, though having a similar long-term growth profile to stocks, this is where the similarity stops. Whereas shares in companies like Tesla have an underlying value, i.e., the financial performance of the company which drives the price of the shares, and the value of the company can be projected by the demand of the company’s products and services. In addition to the market value of the shares, there is the question on dividends. Companies do share profits with shareholders from time to time in the form of dividends. Therefore, the investor in stocks has both the increase in value to look forward to and also the occasional dividends.

This is not the same with bitcoin tokens. There is no underlying value to bitcoin tokens, there are no dividends. Similar to gold, the value is primarily due to scarcity of the product and the belief that it can be exchanged for value where someone is willing to accept it for something of value. However, unlike gold, bitcoin tokens are divisible and speedily transportable. This makes it a prime target for market speculators which brings a high level of volatility to the price of bitcoin tokens in the short run. This volatility makes bitcoin tokens unsuited for medium- to short-term investment unless you are a very experienced trader with an appetite for sudden and big losses.

Compared to stocks, where the price movements usually take hours, the price of bitcoin tokens can move into either direction literally in seconds, not giving the most professional investor time to react. A medium- or short-term investor might find the sudden fall in price and duration of a low price, which is called a bear market, too much if the investment proceeds were needed during this period.

PRICE OF BITCOIN

The truth is the price of bitcoin tokens are primarily driven today by speculative investments, media hype and so-called experts predicting high price growth with the hope to encourage the unsophisticated to jump in because they don’t want to miss the boom. The same speculators then sell at the high price pushing up the price which can wipe out the investment of the newcomer.

Recently, there has been a push to have governments and companies place bitcoin tokens on their balance sheet as a reserve asset, a near liquid asset you can draw on in times of need. This would appear to be a good idea on the surface given that these reserve assets shouldn’t be needed anytime soon, and some companies have taken up this option and there are central banks of some countries that are considering it. The challenge here is where we say ‘shouldn’t be needed anytime soon’. No one can accurately predict disasters and sudden business downturns and so we have many other companies, especially the large tech companies rejecting this strategy as too risky for their shareholders due to the volatility of the bitcoin tokens.

In conclusion, to answer the question, it depends, if you are a long-term investor for 10+ years then history would show that bitcoin provides tremendous returns over that time. If one chose this path you should still be aware of scammers and charlatans waiting to offer you bitcoin.

The only safe investment in bitcoin is the one where you hold the keys. If you don’t have the keys then the coins aren’t yours and can be lost at any time. So consult professionals before making a move. If you are not a long-term investor and you don’t have the stomach for sudden losses then stay away, especially for those offering quick returns on various bitcoin schemes.

If it’s not generally a good investment option, then what use is it you might ask? Why all the excitement? Bitcoin money has been called ‘Freedom Money’. What exactly is that? Join us for part three when we look at the real use of bitcoin and more precisely the bitcoin technology.

Michael Ennis BA, MBA is an information system consultant.

He is not an investor in digital assets, including bitcoin. However, he is a director of a bitcoin technology company. Email: mail2michaelennis@gmial.com