Should You Invest in Bitcoin in 2021? Understanding Cryptocurrencies

It wasn’t a long time ago when cryptocurrencies were considered disruptive forces to the investment world. In the last few years, cryptocurrencies have become serious investment instruments with some big names investing heavily in digital currencies.

Cryptocurrencies remain highly volatile investment options even after reaching a significantly higher price mark. For investors, the volatile nature of cryptocurrencies like bitcoin and Ethereum remains the biggest opportunity as well as risk.

You may have heard the Elon Musk news on betting his money on Bitcoins. You’ll wonder it’s worth investing in an instrument in which the world’s one of the richest persons wants to invest. You surely should give it a thought. But remember, the golden rule of investments is to know the instrument well before you bet your money.

Let’s take you through our guide on understanding Bitcoin.

What is Bitcoin?

Bitcoin is a digital currency that was introduced in 2008 by an autonomous inventor Satoshi Nakamoto. It uses blockchain technology to operate the Bitcoin platform. Cryptocurrencies are built on blockchain technology.

Bitcoin uses peer-to-peer trading technology with no central banks or financial regulators to control it. It uses fully decentralized processing technology. The prime objective of launching a digital currency was to facilitate the public with daily transactions. It was aimed to provide an alternative option to the traditional fiat currencies like the Dollar, Euro, or Pound.

Since its inception, Bitcoin has evolved a lot. It has become a trading instrument rather an alternative digital currency. However, in many countries Bitcoin is being used as an alternative currency as well.

Cryptocurrencies like Bitcoin have the advantage of seamless cross-border integration. It means Bitcoin can be traded from anywhere and at the same price. It embeds the hybrid characteristics of a currency and investment instrument simultaneously.

The Price History of Bitcoin

The Bitcoin is currently trading at $ 57, 051 as of the time of this writing. When it was launched in 2008 it was worth $ 0.0008. A few days later it was trading at a meager $0.8 and remained well-below $1 mark for a long time.

It took Bitcoin several months to cross the $1 mark. For many years Bitcoin stayed below the $100 mark too. It was first boosted in 2014 when it crossed the psychological barrier of $1,000 mark.

Bitcoin saw many fluctuations in the price since its inception. The trend of high volatility continues till day as well. Bitcoin touched the first significant price mark of $ 19,000 in 2017.

It had to be the pandemic year of 2020 that gave Bitcoin the historic price boost and it touched the $ 50,000 mark. Investors forecasted dipping prices of the Dollar due to economic recession and pandemic hardships. Bitcoin and cryptocurrencies soon became popular alternative choices of investors globally.

Why Bitcoin has been so Volatile? The Risk Factor

If you consider trading an instrument, it will always carry the risk factor. No investment is risk-free in the world. However, Bitcoin has had a particularly volatile pricing history as we discussed earlier.

There are no second thoughts on Bitcoin being one of the riskiest and volatile trading instruments in the world. The volatile nature of Bitcoin has several contributors to the phenomenon.

Here are a few key points that affect the highly volatile price value of Bitcoin.

The Perceived Value of Bitcoin

It can be a digital currency, a popular alternative to fiat currencies. Yet it is perceived more of a commodity, like gold. It’s the advantage of Bitcoin, but it turns into a disadvantage when it comes to price volatility.

Legislative Barriers

It may surprise you, but Bitcoin trading hasn’t been legalized in several jurisdictions yet. In fact, many online brokers are reluctant to offer Cryptocurrencies as a trading option.

Tax treatment

The IRS says the tax treatment of proceeds from trading Bitcoins and Cryptos is like an asset. It soars up the tax burden of investors in such jurisdiction that causes big risks for Bitcoins.

Liquidity

If you are trading one bitcoin at around the $57,000 mark and big investors hold something around $ 1 million it becomes extremely difficult to liquidate the investment quickly. There are currently no ETFs for Bitcoins too.

Cybersecurity Issues

Bitcoin users can sometimes express their concerns on cybersecurity lapses for improvements. The digital perception of the currency makes it highly suspicious for cybercrimes.

Finite Number of Bitcoins

The Bitcoin maximum number is set at a finite figure of 21 million only. Currently, there are around 18 million bitcoins in circulation. Its biggest advantage becomes the disadvantage when it comes to controlling the price volatility.

There are several other factors that cause the price volatility in Bitcoin as well.

Let us move on to some of the recent news that has caught the eye of many with bitcoin investment.

What Did Elon Musk say about Bitcoin?

Elon Musk has been vocal on Bitcoin and its prospects in recent months. He stated several encouraging remarks on bitcoin becoming the mainstream trading instrument. For example, Musk Said; “bitcoin is on the Verge of getting broad acceptance”.

Recently Elon Musk owned Tesla gave a big boost to Bitcoin by announcing that it could soon be accepting Tesla car payment through Bitcoins.

Elon Musk stated a few things conservatively about Bitcoins in the past as well. For example, once Elon Musk called Bitcoin “a good thing” only. He said, “I should have invested in Bitcoins eight years ago” in the same statement.

There is no denying that Elon Musk has stated several good things about Bitcoins. Such high-profile figures talking openly about the Future of Bitcoin and Digital Currencies certainly give a big boost to a growing trend.

Will the Elon Musk Influence Reshape the Future of Bitcoin?

So did all the hype created by Elon Musk and Tesla on Bitcoin work well for them? It certainly did in the beginning. The news had sparked a 12% rise in bitcoin price and a 3% price increase on Tesla Stocks on the next morning of the news. Tesla had invested $ 1.5 billion in Bitcoins recently.

Everything does not work smoothly in the trading world. Not so for such highly volatile trading instruments like Bitcoin. Elon Musk’s Tesla Lost $ 15.2 billion in a single day over a comment made by himself.

There is no denying the fact that high-profile figures like Elon Musk can move the stocks in a jiffy. There have been some other high-profile investors in Bitcoin like Square and Salesforce as well.

As much as the high-profile investors bolster the Bitcoin trading confidence, it can extremely become riskier as well. In short, the influencers weighing in on Bitcoin haven’t succeeded in reducing its notoriously volatile nature.

Should You Invest in Bitcoin?

There is no straightforward answer to it. If you are a risk-averse trader and do not like to take much risks, it isn’t your go-to option. Conversely, if you’re good at taking trading risks and have the knowledge to trade it rightly, you should consider investing in Bitcoin.

Bitcoin remains highly volatile and speculative in nature as it is evident throughout history. Bitcoin remains one of the riskiest investment options ever. It can turn your fortunes in a few days, but you can go bust in a jiffy as well.

Still, the cybercrimes and scams around bitcoin trading haven’t abated as well. In all, it remains a highly risky venture. At the same, if you have a risk appetite, you should give it a go.

How to Invest in Bitcoin?

The easiest way to invest in Bitcoins is through Bitcoin Exchanges. You can directly buy bitcoins through these dedicated cryptocurrency exchanges safely. You can also invest in bitcoins through online brokers. Most online brokers offer Bitcoins through CFDs only.

Another way of trading bitcoin is through peer-to-peer trading. You can directly buy from private investors at market prices, it can save you the broker commission and processing costs. However, it is a risky option as online scammers can hit you badly.

You can also purchase bitcoin through dedicated ATMs in selective regions. You’ll need to make the first purchase through the traditional fiat currencies. You can pay through any traditional method of debit/credit cards or bank transfers.

What are the Prospects of Bitcoin?

For many years Bitcoin traded well below the $100 mark. Currently, it has crossed the $ 50,000. Investors didn’t mention Bitcoin as one of the tradable opportunities for many years. Today. People like Elon Musk have been vocal on it.

Given the price swings, scams, and cybersecurity issues, bitcoin is far from a stable investment option. It faces legislative challenges in many jurisdictions as well. It lacked the attention of institutional investors for many years as well.

Despite all the risk factors, once Bitcoins becomes acceptable for mainstream investors, it will achieve the stability it lacks for now. It will also need to improve on technology, cybersecurity, and legislative measures as well.

The information provided is for educational purposes only and is not intended as investment advice for anyone. All information discussed is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The views presented today are those of WealthCare Financial and do not necessarily represent the views of AlphaStar Capital Management, LLC. The opinions expressed are subject to change without notice and do not constitute financial, legal or tax advice. Please consult your financial professional before executing any financial strategy.  Investment Advisory and financial planning services are offered through AlphaStar Capital Management, LLC, an SEC registered investment adviser. AlphaStar and WealthCare Financial are independent entities