Bitcoin has been one of the best-performing financial assets of the past ten years. And in the past five years, Bitcoin has returned more than 1400%, which is significantly higher than the S&P 500 and Dow Jones Industrial Average. Even with the sharp declines of the past year, it has performed better than the overall stock market, as shown below.
While Bitcoin has continued to outperform the market, this article will make the case for trading it, rather than long term investing. When you invest in Bitcoin, your main objective is for the price to continue increasing in the long term. Trading Bitcoin, on the other hand, involves making short-term buy and sell trades with the aim of capitalizing in short-term gains and losses.
An Uncertain Future?
Like all investments, the future of Bitcoin is still uncertain. Whilst no one can accurately predict what will happen with Bitcoin, the consensus is that its future will depend on more widespread adoption. So far, buyers and sellers have not embraced the currency. In fact, only a few retailers accept Bitcoin, and a small segment of the market has embraced it. Therefore, this makes the case against long term investing in Bitcoin when its future is still unclear.
Bitcoin is arguably one of the most revolutionary ideas in our lifetime. Its rise is evidence that people around the world are looking for an alternative to regular currencies. However, the number of competing cryptocurrencies has continued to rise. As the time of writing, there were almost 2000 cryptocurrencies tracked by CoinMarketCap. Although many will remain niche, and some have questionable value, there are also alternatives such as ETH and XRP that are potential competitors to Bitcoin for the most useful cryptocurrency.
Lack of Acceptance
Bitcoin is the world’s biggest cryptocurrency with a market capitalization of more than $150 billion. The goal of its creator, Satoshi Nakamoto, was to create an alternative to fiat currencies. However, more than ten years since its launch, Bitcoin has continued to be a niche currency that is not widely accepted. Most large retailers like Walmart and Amazon have shunned the currency because of its volatility. Therefore, without any mass appeal, there is a possibility that it will never be adopted in the mainstream. There is also the prospect that a more useful alternative will instead receive mass adoption, as mentioned above.
There are parallels for these elsewhere in the technology sector. Many years before Facebook rose to prominence, MySpace dominated the social networking space. Similarly, before Google become number one, search engines like Yahoo and Infoseek were popular.
Another important issue on the acceptance of Bitcoin is its price. As of this writing, one Bitcoin costs more than $8000. This makes it widely unaffordable for many people.
Bitcoin’s volatility is another reason why Bitcoin might not make a good long-term investment. It is not uncommon to find the price of Bitcoin fluctuate by more than 10% in a single day. This is not what long term investors normally want. Instead, they prefer to buy and hold securities that will rise steadily over time. On the other hand, day traders thrive in volatility. They can make more money when a security’s price moves up and down by more percentages every day.
As a relatively new currency, Bitcoin and the underlying blockchain technology still faces potential regulatory issues. Governments around the world are trying to find ways to regulate the cryptocurrency industry. To date, most governments have not come up with viable regulations because the sector is not fully understood. There is also an argument that regulators will not want to allow a decentralized currency to exist, which they don’t have control over. One reason why governments have not had a major crackdown is that there is no mass adoption.
Bitcoin is an exemplary innovation that has revolutionized the financial world. While the price of Bitcoin might continue moving up in the long term, there are many valid concerns to stay in the sidelines. With its volatility, it therefore makes more sense being a Bitcoin day trader than a long-term ‘holder’.