Is cryptocurrency the money of the future or will it explode and take investor money with it? Bitcoin-like cryptocurrency have become a global phenomenon and, for some investors, has taken over gold as a safe haven asset. But should Bitcoin or other decentralized cryptocurrencies be in everyone’s portfolio? Just like you would with any currency, virtual or tangible, you need to know what you’re getting yourself into.
The Case for Cryptocurrencies
Bitcoin was born out of fear in 2008, right around the time the stock market was crashing, the U.S. dollar was plunging, and the Federal Reserve was introducing its first round of quantitative easing (flooding the market with trillions in U.S. dollars).
The idea of a currency that doesn’t need a bank, doesn’t rely on central banks, and isn’t impacted by the global reserve currency is very attractive for those who do not trust the idea of a fiat currency that can be seized and manipulated.
The decentralized structure is also attractive for those looking to store their wealth beyond the reach of “Uncle Sam.” So too is the idea that there is a finite number of Bitcoin that can ever be mined. Today, 16.58 million Bitcoin are in circulation, representing $62.62 billion. And it’s mathematically impossible for circulation to exceed 21 million.
But that’s a little misleading. It is estimated that as many as 25% of all Bitcoins mined are lost forever; either because of discarded hard drives, carelessness, lost (virtual) Bitcoin wallets, or lost passwords (keys). To combat that scarcity, and increase use, a Bitcoin can be broken down into an infinite number of fractions.
At the end of September, Bitcoin was trading at the $3,900 price level—a more than 300% year-to-date increase and $2,600 premium over the price of gold bullion.
And there is a strong case for Bitcoin and other cryptocurrencies, like Ethereum, Litecoin, Ripple, and Monero to trend higher.
That’s because the value of Bitcoin and other altcoins (and traditional currencies in general) rise and fall on everything from geopolitical tensions, economic conditions, weather patterns, election outcomes, the weather—anything you can think of.
On top of that, Bitcoin is becoming increasingly easier to purchase and trade, with more than 75 exchanges that trade cryptocurrency. Moreover, a large number of cryptocurrency ATMs popping up all over the place. Bitcoin and other cryptocurrencies are also highly liquid. They can be bought and sold in small and large amounts and converted into other currencies.
With the value of the U.S. dollar tumbling, concerns about the strength of the Canadian dollar, and instability of currencies in developing and emerging markets, cryptocurrencies could very well be the best alternative to fiat currency. All traders need is a smartphone and internet connection.
This might explain why so many governments are starting to test their own form of cryptocurrency. Which is a little ironic when you consider Bitcoin was created to circumvent the need for banks.
Though it does illustrate how far once derided cryptocurrencies have come and how far they could go.
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- “Cryptocurrency Market Capitalization,” coinmarketcap.com, September 25, 2017; https://coinmarketcap.com/coins/views/all/.
- “Bitcoins in circulation,” blockchain.info, September 25, 2017; https://blockchain.info/charts/total-bitcoins.
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