Bitcoin is currently viewed by many investors as "digital gold," but it could also be used as a digital form of cash. There's been a lot of debate about Bitcoin and other cryptocurrencies, Its proponents argue that it's the future of currency and investing, while its detractors argue that it's a risky investment option that may not generate big returns.
Keep on reading should you require a more in-depth walkthrough of the bitcoin's investment value.
What to Consider First?
Before you decide on any investment, you should look at asset allocation. Simply put, asset allocation means spreading your investments across various instruments to provide diversified returns over the long run. The same applies to cryptocurrencies – you should decide on your risk tolerance, financial goals, and timeframe to decide how much of your investment portfolio can be allocated to cryptocurrencies.
What is Bitcoin?
Bitcoin was created by a programmer or group of programmers using the name "Satoshi Nakamoto." But the real creator(s) of Bitcoin is still unknown to the public.
Bitcoin is a form of digital cash that eliminates the need for central authorities such as banks or governments. Instead, Bitcoin uses a peer-to-peer internet network to confirm purchases directly between users.
Bitcoin demonstrates some attributes for a currency, but its main source of value lies in its restricted supply and increasing demand. If the price of one bitcoin were to reach $514,000, Bitcoin's market capitalization would reach approximately 15% of the global currency market.
What Determines Bitcoin's Price?
Bitcoin is not issued by a central bank or backed by a government, therefore, the monetary policy tools, inflation rates, and economic growth measurements that typically influence the value of a currency do not apply to Bitcoin. Bitcoin acts as more of a commodity being used to store value, so the following factors influence its price:
● The supply of Bitcoin and the market's demand for it
● The number of competing cryptocurrencies
● The cost of producing a bitcoin through the mining process
● Regulations governing its sale and use
● Media and news
The supply of an asset plays a vital role in determining its price. A scarce asset is more likely to have high prices, whereas one available in plenty will have low prices. Bitcoin's supply is generally well-publicized, as there will only ever be 21 million produced and only a specific amount created per year. Its protocol only allows new bitcoins to be created at a fixed rate, and that rate is designed to slow down over time. Bitcoin's future supply is therefore dwindling, which adds to demand.
How Does Bitcoin Work?
Each Bitcoin is a file stored in a digital wallet on a computer or smartphone. To understand how the cryptocurrency works, it helps to understand these terms and a little context:
● Blockchain: Bitcoin is powered by open-source code known as the blockchain, which creates a shared public history of transactions organized into "blocks" that are "chained" together to prevent tampering. This technology creates a permanent record of each transaction, and it provides a way for every Bitcoin user to operate with the same understanding of who owns what.
● Private and public keys: A Bitcoin wallet contains a public key and a private key, which work together to allow the owner to initiate and digitally sign transactions. This unlocks the central function of Bitcoin — securely transferring ownership from one user to another.
● Bitcoin mining: Users on the Bitcoin network verify transactions through a process known as mining, which is designed to confirm that new transactions are consistent with other transactions that have been completed in the past. This ensures that you can't spend a Bitcoin you don't have, or that you have previously spent.
Why Do Bitcoins Have Value?
First and foremost, Bitcoin has value due to the same reason paper and digital cash do – it's a handy form of money commonly accepted by people. It is used to transfer value and buy or sell things, you can easily move it from one exchange account or digital wallet to another. Yet, unlike the US dollars, whose value and legal status are enforced by the government, Bitcoin's value comes from its code, infrastructure, scarcity, and adoption.
Although it's not tangible, Bitcoin's code gives it features of traditional fiat currency, including scarcity, divisibility, portability, fungibility, and recognizability. Besides, Bitcoin is decentralized and can be used without middlemen, provides some level of transparency, can be accessed and used by anyone with an internet connection, is impossible to counterfeit and confiscate, and has other features such as programmability.
Most importantly, bitcoin's maximum supply is 21 million. There will never be any more than 21 million Bitcoin. To many experts, this limited supply, or scarcity, is a big contributor to Bitcoin's value.
Is Bitcoin a Good Investment in 2022
The real answer is no investment is inherently "good" or "bad." It depends entirely on your risk tolerance, your investment strategy, and your financial goals. Before you consider Bitcoin as an investment, you should carefully consider your own goals and determine what you want to accomplish in your investment activities. Do you want to develop a passive income? Become a full-time investor? Save for retirement? Answering these questions will help you figure out whether Bitcoin is the right investment option for you.
Bitcoin is a very high-risk investment because it's a volatile asset. That means that Bitcoin values may rise or fall dramatically in value over a very short period—even as quickly as a few hours or days.
Like all cryptocurrencies, Bitcoin has no intrinsic value. It's not backed by any physical asset, like gold or silver, and there's no central regulator to ensure that the value remains stable. Furthermore, Bitcoin value isn't linked to the profits of any one corporation. The value of Bitcoin is dependent on market demand. When there are more people buying Bitcoin, the value will increase. When there are fewer people buying Bitcoin, the value will decrease.
To make a significant profit on Bitcoin, you may need to rely on "timing the market," which is a difficult and generally ill-advised investment strategy. Nonetheless, there’s a potential for profit.
Should You Invest in Cryptocurrency?
Owning some cryptocurrency can increase your portfolio's diversification since cryptocurrencies such as Bitcoin have historically shown few price correlations with the U.S. stock market. If you believe that cryptocurrency usage will become increasingly widespread over time, then it probably makes sense for you to buy some crypto directly as part of a diversified portfolio. For every cryptocurrency that you invest in, be sure to have an investment thesis as to why that currency will stand the test of time. If you do your research and learn as much as possible about how to invest in cryptocurrency, you should be able to manage the investment risk as part of your overall portfolio.
Is Bitcoin a good investment? It can be, so long as you do your research and invest wisely. In addition, bitcoin is a highly volatile asset that's prone to large and fast swings in value, which presents an opportunity for large returns but also poses a tremendous risk. It is critical that you learn how to invest in Bitcoin responsibly before making any decisions. Be sure to diversify your investment portfolio to protect yourself from marketplace volatility.