Bitcoin: Obscure Internet Currency, Hot Potato, Shield Against Rogue Government or Interplanetary Super-Asset?
02 Nov 2020
Bitcoin is a program as well as the name of the cryptocurrency that belongs to it.
- As a program, Bitcoin lives only on the Internet. It is not controlled by any one person or organization, but is instead maintained by ‘miners’ who can earn Bitcoin from the program by ensuring the network’s continuity, security and integrity.
- As a currency, the program only allows for the ‘mining’ of 21 million Bitcoin which makes it a scarce asset - like gold. When you buy Bitcoin, the program will record your wallet address and the amount of Bitcoin that is held in that address.
What is your investment horizon?The price of Bitcoin is primarily determined by forces in the market. What happens on exchanges like Binance, Coinbase or AAX can be followed on price data sites such as coinmarketcap.com. This gives a good indication of the price of Bitcoin. The price changes continuously. In a way, Bitcoin is like oil in terms of volatility and the way it responds to the forces of supply and demand. But, recently, it’s also been compared to a fine wine or a whiskey - a luxury item that increases in value over time. If you’re intent on making money fast, by trading actively, then Bitcoin can be an interesting asset to engage. It is very volatile and although at times its movements feel arbitrary, as you begin to understand the market better, you’ll find it is not as arbitrary as one might think. Part of the reason for Bitcoin’s volatility is that compared to other more established markets like gold or SP500, Bitcoin’s market cap is still relatively small, making it more susceptible to price fluctuations. But as with all markets, there are patterns and trends and there is sufficient liquidity to allow for day traders, swing traders and long term HODLers to engage the market in line with their own risk appetite. For short term traders, we provide bi-weekly Intelligence Reports where we analyze the price of Bitcoin with the help of various technical indicators. This could be of help when making decisions about buying or selling. For long term investors in Bitcoin, we highly recommend an excellent report by Grayscale which deals extensively with the question of why Bitcoin is important today, against the backdrop of quantitative easing, but the report also covers a few key metrics that can help investors get a better view on this young asset. Long term investors would most probably be interested to learn more about the stock-to-flow model applied to Bitcoin. The graph shared by Grayscale suggests that Bitcoin has indeed followed the model faithfully, and while we cannot take anything for granted simply based on historical performance, it’s still worth noting and studying.
The Significance of BitcoinBitcoin is important for many different reasons and we cannot deal with all of these reasons here. But there are two points worth making. First, as a digital asset, rooted in a blockchain protocol, Bitcoin has certain advantages over other assets.
- Bitcoin can be purchased, accessed and transferred by anyone and to anyone that has an Internet connection and a device.
- Like gold, Bitcoin is scarce (a driver of value) but unlike gold, Bitcoin doesn’t weigh anything, making it easy to keep it with you (so to speak), and unlike most other assets, it is incredibly difficult for authorities to confiscate your Bitcoin (let alone, find out if you own any).
Spot or Perpetual Futures Contracts?Buying Bitcoin on the spot market and holding it for a long time is more than just setting yourself up for possible gains in the future. Holding Bitcoin is a way to diversify your portfolio and protect your wealth against inflation. But while spot trading or simply HODLing the real asset in your wallet is a worthy endeavour, Bitcoin’s volatility also lends itself well to futures trading. We don’t have to go into this too deeply at this stage, but basically, futures trading allows you to gain exposure to the price of Bitcoin and enables you to make a profit, even if the price of Bitcoin goes down. You can learn more about this from one of our previous posts where we discuss the power of derivatives. Whether or not it is the right time to buy Bitcoin or some other digital asset like Ethereum is of course up to you and whether or not you believe Bitcoin has a future. If anything, the real and ultimate value of Bitcoin is that it encourages us to critically think about that future. And as we do, we are prompted to reconsider concepts such as ownership, value, prosperity, trust and power. It seems to me that these conversations are vital. Now, perhaps, more than ever. But then, we always that. So, maybe just vital: now, just as much as yesterday.
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