Is Bitcoin a Good Investment?

Last updated on 01/14/2019

Should you invest in bitcoin? Obviously, the answer to that question depends on a range of factors, including how much you understand about bitcoin, your ability to tolerate risk, the future value of bitcoin and more.

What to Know About Bitcoin Before Investing

Before investing in bitcoin, you should make sure that you understand how bitcoin actually works, both in a technical sense and as an investment asset. Because bitcoin (and cryptocurrency in general) represents a new and complex type of investment, investing successfully in bitcoin requires you to know more about how bitcoin works than you’d need to understand about a given company in order to invest competently in its stock.

From a technical perspective, it may not be necessary to understand every aspect of bitcoin and the Bitcoin blockchain. At a minimum, however, you should familiarize yourself with topics such as how bitcoin mining works (and how you can mine bitcoin); the differences between bitcoin and altcoins like ether and bitcoin cash; and how the design of the Bitcoin blockchain limits the total number of bitcoin that can be created.

From an investment perspective, it’s important to understand concepts such as how and where bitcoin is taxed; whether bitcoin is legal (for investment purchases as well as transactional purposes) in the place where you live; and how to buy and sell bitcoin on a cryptocurrency exchange.

These are all basic points of information to understand in order to assess the extent to which bitcoin will meet your investment goals, as well as for going about actually investing in bitcoin.

Bitcoin Investing Risks

Bitcoin has been in existence for about a decade, but it remains a highly volatile investment — much more so than most stocks. The value of bitcoin has a history of fluctuating widely; the cryptocurrency has seen its value climb from under a dollar to over $19,000 since its existence, and has moved over 20 percent in a single direction within 24 hours several times.

This not only means that an investment in bitcoin can be profitable but also that it entails a fair amount of risk. If your ability to accept risk is limited, bitcoin may not be a good investment choice, at least not as a significant part of your investment portfolio.

In a similar vein, it is wise to think about how long you will be able to hold your bitcoin. Over the long term, the value of bitcoin has risen steadily for the most part. This means that, if you can hold onto bitcoin for years, you are likely to be able to ride out fluctuations in its price and reap positive investment returns in the long run. (Even folks who bought bitcoin in 2017, when its price peaked at over $19,000, may eventually profit if they hold onto their bitcoin long enough.)

Will Bitcoin Prices Rise?

Obviously, the answer to the question of whether bitcoin is a wise investment hinges ultimately on the extent to which bitcoin’s value will rise in the future. No one knows for sure what will happen in this regard.

For most of bitcoin’s history, bitcoin’s price on exchanges rose steadily and significantly. A bitcoin that cost a few pennies in 2009 was worth about $20,000 in late 2017. It is almost unheard of for the stock market, real estate and other common types of investments to achieve that level of appreciation.

Will bitcoin’s value continue to rise over time? There are reasons to believe it will, including the following:

  • Many governments and banks have taken a friendly stance toward bitcoin in recent years, suggesting that bitcoin will become easier to use for everyday purposes and therefore more valuable.
  • The total number of bitcoin that can ever be created is limited. This finite supply encourages a growth in the value of bitcoin (assuming that demand for bitcoin continues to grow).

On the other hand, naysayers might argue that bitcoin is not likely to see steep price increases ever again, due to the following:

  • There are now hundreds of other cryptocurrencies competing with bitcoin. Some of them offer features (like smart contracts and DApps on Ethereum) that bitcoin lacks.
  • Although bitcoin has been around for about a decade, people’s ability to use it for real-world transactions remains limited because businesses that accept bitcoin remain in the minority. It’s unclear if or when that will change.
  • Past surges in bitcoin’s price (especially the increases of 2017) were driven largely by investor speculation rather than an increase in the real-world value of bitcoin as a type of currency.

The bottom line: Bitcoin remains an attractive investment for many people, and bitcoin investors can potentially reap rewards much higher than they could achieve in the stock market or other traditional types of investments. However, there is no denying that bitcoin remains a comparatively risky investment whose future value is hard to predict.