Bitcoin, the cryptocurrency that has gained a lot of attention in recent years, finally surpassed the price of gold for the first time early in March of 2017, rising to $1,289.09 per unit, compared to gold at $1,231.50 per ounce. Even if you haven’t given the currency much consideration over the years, the growth has been impressive—in 2015, the price was around $400. Its success has prompted many people worldwide to invest in bitcoin, as another form of insurance in a volatile market. Though the very nature of the currency doesn’t lend itself to regulation, some have expressed interest in making bitcoin a viable currency for traditional investing options (like an exchange-traded fund)—potentially making the currency more attractive to investors. A recent rejection by the SEC of one of these initiatives has once again dropped the currency below $1000 per unit, but this setback isn’t likely to trip up the cryptocurrency for long. Of course, like any investing option, there are pros and cons to getting involved with bitcoin. If you’ve been thinking of turning to bitcoin in these uncertain economic times, read on to learn more about the risks and benefits.
The Pros of Bitcoin
One of the most attractive aspects of bitcoin is that it’s not tied to any traditional financial institution or government. While the currency can and does fluctuate, the factors affecting its worth are not centralized to a government or bank. Another reason that bitcoin’s value will be difficult to drive down over time is that it’s not a resource that can be increased when demand is high—the bitcoin system creates new currency at a fixed rate, and will eventually encounter a cap of 21 million units. This scarcity creates value, like gold, that is likely to be ongoing. Unlike gold, however, bitcoin is easily transferable, which fits in well with our evolving methods of payment.
Bitcoin operates on “blockchain” technology, a new way of storing information that uses a distributed ledger system. Bitcoin traders can remain anonymous, and the system is not centralized, which means it is much more difficult to hack into. However, the technology is not infallible, and bitcoin hacks have occurred in the past.
Cons of Bitcoin
The risks of investing in bitcoin are fairly simple: bitcoin is inherently volatile, and it’s not backed by legal protections. Bitcoin is subject to fluctuations in value that can be more sudden than government-backed currency. There’s also uncertainty surrounding the regulatory future of bitcoin—will governments intervene to limit bitcoin? Will the cap ever be removed, allowing inflation to occur? Will another cryptocurrency take over? These are questions that don’t have easy answers at this point. And although blockchain technology is catching on for its superior security, hacks are still a concern for any digital currency. Finally, there are scalability issues. Currently, transactions take between 20-40 minutes, which could cause major problems as more transactions take place. Our wi-fi infrastructure continues to strain under the pressure we place on it, and the bitcoin system may have problems scaling on top of that.
Should You Invest?
So now that you know the pros and cons of bitcoin, should you invest? That’s a tricky question, because every investor is different. Most experts don’t recommend investing solely in bitcoin, but as part of a diversified portfolio. As long as you are willing to accept the risk of an unregulated currency, bitcoin investments could result in healthy returns in the future. It all depends what you’re willing to risk—and how much the idea of a decentralized currency appeals to you. Remember, it’s not black and white—and it’s totally up to you whether you want to take a chance on cryptocurrency.