Even if you’re not a gamer or Wall Street follower, you’ve probably been hearing a lot over the past few weeks about GameStop and how small-time investors are giving billion-dollar hedge funds a run for their money. These kinds of trends in the investment world pop up from time to time and it can be hard not to think you’re missing out on a way to get rich quickly.
There is, however, one trend over the past few years that has triggered the most FOMO (fear of missing out) in investors: the rise in popularity of the cryptocurrency Bitcoin. But what is Bitcoin exactly? Why is it popular again? Should you invest in it? To help guide your financial decision-making, we answer these top three questions about Bitcoin.
What is Bitcoin?
Bitcoin is a cryptocurrency, which is the combination of “encryption” and “currency”. Instead of being a tangible bill or coin, Bitcoin is basically just lines of code. It is not backed by a government or tied to the gold standard. It’s also not a common stock of a company and it is not traded on exchanges, such as the New York Stock Exchange, so in order to get rid of it, you have to wait for a buyer. The value is decided on how much people think it is worth, which is why it has had major upswings and downswings.
Unlike traditional currency that is regulated by a government, Bitcoin isn’t regulated by a trusted third party. But, just as the U.S. Federal Reserve limits currency, Bitcoin is limited to 21 million coins in order to keep supply or demand from getting out of control.
Why is Bitcoin Trending?
2020 was a really good year for Bitcoin. It started the year valued at $7,200 and finished at almost $30,000. That’s a 296 percent increase. To give you a comparison, the S&P 500 rose 16 percent. And so far in 2021, that rise continues. Bitcoin hit an all-time high of $40,000 in early January and finished the month up 17 percent from the end of 2020. Those numbers are why so many investors are asking if they should join the party.
The reason Bitcoin became so popular last year (and continues to be) is because of the COVID-19 pandemic. Many countries, including the U.S., have passed stimulus packages for individuals and businesses. This increases the supply of currency available, which increases the concern for inflation and the short- and long-term buying power of the dollar. Since Bitcoin has a fixed supply, it would not be affected by inflation. Therefore, investors see it as an investment that will appreciate or at least maintain value.
Should You Invest in Bitcoin?
Right now, Bitcoin looks like a great way to diversify your portfolio. But many investors thought the same thing in 2017, when Bitcoin started at below $1,000 and finished at nearly $20,000. The following year, however, it went through a series of crashes that caused it to fall to under $4,000.
Because it’s value isn’t tied to anything tangible or regulated the way traditional currency or stocks are, Bitcoin can be extremely volatile. In a recent survey of market professionals by Deutsche Bank, Bitcoin was identified as the top bubble that could “pop.”
Bitcoin may not be the most sensible investment for most investors due to its high volatility and lack of ways to “spend” it. But if your heart is set on getting in on the Bitcoin action, we highly recommend using only discretionary funds — perhaps a year-end bonus, tax refund, or a vacation fund that you can’t use right now because of travel restrictions. You can satisfy your FOMO and curiosity without taking on too much risk or veering off your financial plan.
Have more questions about your portfolio or overall financial health? Don’t hesitate to reach out to your RiversEdge Advisor. We’re always here to help.