I have yet to talk about Bitcoin, and I am probably severely overdue for this post. Bitcoin is all the rage, and has been since it was first released for trading on July 18, 2010.
First of all, what exactly is Bitcoin?
Bitcoin is known as a “crypto-currency.” It is not a true currency in the sense that it is legal tender, or is accepted as a median of exchange for all transactions. In fact, few businesses (in the scope of the global economy) accept Bitcoin as a currency. Lists of companies can be found online, but these lists are constantly changing. Bitcoin is a digital currency and has no physical form.
In addition to being purchased and used as a currency, many people and many institutions have sought out Bitcoin as an investment opportunity. It has been securitized and is traded in a similar way that stocks are traded.
How good of an investment is Bitcoin?
At the time it opened for trading on July 18, 2010, Bitcoin had a market value of $0.09. Upon market close on September 20, 2017 (over 7 years later), the market value was $3,858.09.
That is a price increase of 4,255,411.11% total, or 592,371.75% per year! That is an astonishingly high price appreciation! If you bought $1,000 worth of Bitcoin on July 18, 2010, and held it until the market close on September 20, 2017, you would have well over $42,000,000!
1,623.94% per day, anyone?!
Who wouldn’t want that type of investment performance? If you sustained that investment performance, you would be very wealthy in no time flat.
Of course, who the heck knew Bitcoin would take off like it did? The answer? No one.
Bitcoin was very slow out of the gate. It took nearly three months before the market value of Bitcoin reached $0.10. It did not reach $1.00 until February 9, 2011, however it ballooned to $10.00 four months after.
Overall, 2011 was a wild year for Bitcoin as it shot all the way up to $29.60. However, it closed the year at $4.72.
April 1, 2013 was the day that Bitcoin closed at over $100.00. It went bonkers from there, doubling over the course of a couple of days, and then sharply jumping around until it closed the year at $757.50.
From 2014 through 2016, Bitcoin did not make a whole lot of noise. Its market value fluctuated sharply, however it did not make any real significant gains. However, that all changed in 2017.
On February 2, 2017, Bitcoin closed at over $1,000 for the first time. On September 2, 2017, Bitcoin closed at an all-time high of $4,950.72.
“This is all great, Devin. But all I want to know is if Bitcoin is a good investment.”
The short answer is “no.” Bitcoin is not a good investment. In fact, it is a horrible long-term investment!
During its current lifetime (July 18, 2010 to September 20, 2017), Bitcoin has appreciated a lot. However, the price fluctuations were incredibly sharp. The standard deviation of daily returns was 5.93%! What this means is that the price of Bitcoin has fluctuated by about 6% daily. To put that into perspective, imagine that a $1 bill in your pocket changed in value (up and down) by $0.06 every day.
During that same time frame, the S&P 500 stock market index returned 131.14%, which was great as the average annual return was 18.68%. While this return paled in comparison to Bitcoin, the price fluctuations were not nearly as sharp. The standard deviation of daily returns was only 0.91%. However, the stock market gets the bad rap and Bitcoin is often sold as an alternative to the traditional stock market investment.
Bitcoin is not a good investment option. Buying and selling Bitcoin for investment purposes is purely speculation and gambling. If you want to try dabbling in Bitcoin, then that is your decision, however I recommend limiting your exposure to a very small portion of your overall portfolio (less than 5%).
The price fluctuations are way too sporadic, the time it takes to transact with Bitcoin is way too long, and there is no intrinsic value other than what others “think” Bitcoin is worth.