Should I Invest in Bitcoin? Four Reasons Why

Should I Invest in Bitcoin?

Many smart and savvy investors are asking, should I invest in Bitcoin? A lot of this interest is because the digital currency is all over the news headlines today. So of course its natural for investors who don’t hold any to wonder if they should start buying some too. So, today I’m going to give you four reasons you should seriously consider investing in Bitcoin. I will assume you have at least heard of Bitcoin and at least know its a digital currency that was introduced to the world in January 2009. It has a very volatile and storied 10 year history but it looks to be standing the test of time. However, if you would like a good introduction to Bitcoin and what makes it so special, please read these excellent articles.

Curious About the Tech Behind Bitcoin?

Our purposes today is to discuss the investment opportunity surrounding this asset, not the underlying technology. However, if you would like to learn more about Bitcoin and the technology behind it, a quick Google search for “Bitcoin”, “Cryptocurrency”, or “Blockchain” will get you going. It would also be useful to watch this YouTube video: How does a blockchain work – Simply Explained.

With this out of the way – let’s jump in!

Article Sections

Bitcoin is a Deflationary Currency

The first of four reasons why you should invest in Bitcoin is that Bitcoin is a deflationary currency. This runs opposite to the fiat currency you hold in your hand. Above all, we can know exactly how many bitcoins there are in circulation at any given moment.

For instance, look at the following screen from buybitcoinworldwide.com taken in early November, 2020.

This level of certainty is not available with fiat currencies. For example, we know today that there will only be 21,000,000 bitcoins mined, or issued, into circulation and the last one will be mined in 2140.

On the other hand, the fiat money supply, which is determined by government entities, base their printing on current needs and goals. Put another way, they change the money supply when they want, and in response to economic situations. While this may help with short term problems, it ignores the long term consequence. More importantly, this tends to create an over abundance of the currency over time.

We need to clearly understand that Bitcoin cannot be manipulated the same way. Every day for the next 4 years 900 bitcoins will be mined into circulation. In 2024 this rate will be halved to 450 a day; and so on every four years until 2140. This creates scarcity. To sum it up, fiat prints based on short term need, while Bitcoin mines on a predetermined schedule according to its protocol. As a result, Bitcoin has a terrific long term future when pitted against any fiat currency.

Regarding this endless printing, look at this chart from the US Federal Reserve which shows you how the money supply has grown over the last 20 years:

Supply Curve of US Dollars

Some important things to note:

The money supply grows at a steady or exponential rate
There are few, if any contractions in supply
In 2008 the M2 money supply crossed the 8,000B mark
In 2020 the M2 money supply is approaching 20,000B — an 7.47% annual rate of increase
This chart is backwards looking with no ability to be forward looking.

Above all, fixate on that last point. Governments report what the inflation and money supply IS or WAS. Sure, they might plan with a specific target inflation rate, however news is random and therefore the future supply curve will also be random. Now, contrast this, with the rigid certainty of Bitcoin’s supply curve which is both backwards and forwards looking.

Supply Curve of Newly Mined Bitcoins:

Annual issuance of new coins is reduced every 4 years by half
Supply rate never increases
Chart is lifecycle looking – we can see previous, today, and future supply plans
Mining difficulty increases daily which means the embodied energy in each coin is greater than the last

Consider that the annual inflation rate of new coins now sits at 1.8% and will stay there until 2024 when it will drop to 0.9%; read more about that here. So even now, at this point in time, Bitcoin annual issuance is now below the inflation target of all central banks. This difference will only accelerate and continue to widen further going forward. Above all, I hope the point that Bitcoin as a deflationary currency is made clear. Because over time, it will require more fiat funds to purchase the same Bitcoin even if demand for the digital currency stays static.

Bitcoin Inflation Schedule

Operated by a Decentralized Authority

Secondly, the next reason why you should invest in Bitcoin is that no single authority owns or operates the Bitcoin network. Instead it is operated by a network of equally privileged miners. Furthermore, every computer on the network has the same privilege, and anyone in the world with a computer can be a miner. Indeed, the difficulty of the algorithm has progressed to a point where specialized ASIC computer miners are required. But if you have the money, you can buy the hardware and mine the currency with as much privilege and access as anyone else. The important part here is that being decentralized means it cannot be manipulated or controlled by a government, institutional bank, hedge fund, or other interested party. Everything is done through cold computerized consensus.

Decentralized Points to Consider

Bitcoin network is peer-to-peer; meaning there is no central server or authority
No central storage; the bitcoin ledger is distributed in its entirety across the network
The ledger is public; anybody can store it on their computer
If you change the ledger and upload it; the network will reject the changes because consensus will not be satisfied
Transactions are acknowledged and recorded through consensus by network participants through competition
Anybody can become a miner
Approval is not required to setup a bitcoin wallet and send a transaction; the network merely confirms the transaction is complete and funds sent

The root problem with conventional currencies is all the trust that’s required to make it work. Central banks must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
~Satoshi Nakamoto (Creator of Bitcoin)

Put another way, the central dynamic for Bitcoin investing is you trade a paper currency controlled by a central bank in exchange for a decentralized, deflationary, global currency that is not governed by any one authority. To know just how important this is, we just need to ask the people of Iran or Venezuela!

Industry Adoption is Growing Fast

Thirdly, the next reason you should invest in Bitcoin is that adoption across industries is growing fast and accelerating through 2020 and now into 2021. As all currencies rely on the trust and faith of those that hold it, Bitcoin requires trust and faith in it too. However, faith in cryptocurrencies is not forced upon you like the currency your currently hold and work for. Instead, holders of Bitcoin choose to put their trust and faith in it. This function is called adoption. Consider the following adoptions points for Bitcoin:

Key Adoption Points in 2020

Square buys 50M worth of Bitcoin in October 2020 which represents 1% of its treasury holdings
MicroStrategy buys 450M worth of Bitcoin during August and September 2020
Paypal announces plans to roll-out services allowing customers to purchase, sell, and hold crypto assets (Bitcoin)
Banks including Barclays, Citi Bank, Deutsche Bank and BNP Paribas are investigating ways they might work with Bitcoin
Institutional crypto management firm Grayscale added more than $300 million to the total of crypto assets it manages in one day – October 22, 2020
Iranian government has become the first country to constitute Bitcoin as a legal means of exchange within its jurisdiction
Malaysia, the SC Shariah Advisory Council has declared that it is permissible for Muslims to invest in and trade cryptocurrencies, including Bitcoin
Interview with Stansberry Research on October 7 2020, Raoul Pal, the former Goldman Sachs hedge-fund manager, mentioned that an enormous wall of money is pouring into the asset

Key Adoption Points in 2021

On February 3, 2021, Visa has announced it plans to help banks roll out Bitcoin and cryptocurrency buying and trading services with a Visa crypto software program, set to launch later this year.
On February 8, 2021, Tesla announced they had purchased of 1.5B worth of Bitcoin as a reserve asset and will start accepting payment for their vehicles in Bitcoin.

Adoption Wave

With the current wave of quantitative easing in the United States, along with instability in parts of the world, a lot of institutions adopting Bitcoin as a store of value and reserve currency. Furthermore, they foresee a significant debasing of the US dollar and a slippage of faith in the reserve status of the currency. We see real-time examples of this happening in countries where corruption and currency manipulation is rampant. As consequence, citizens of such countries will buy Bitcoin as a lifeline and a store of value that is extremely portable. There is no limit on how many Bitcoins a private key can hold; it literally fits in your palm and weighs an ounce. Going forward I believe more companies will purchase Bitcoin to diversify their treasury. On top of this, many online shops will begin accepting Bitcoin for payment as worldwide ownership spreads.

Amazon

Next, once Amazon begins to accept Bitcoin as payment, it will achieve a level of legitimacy that will propel the currency into the mainstream. PayPal adopting Bitcoin was the first move that should put some pressure on Amazon to accept it for payment.

Back in 2017, Bitcoin had a massive run up in price. This was also the same year Amazon bought four domains: amazonbitcoin.com, amazonethereum.com, amazoncryptocurrency.com, and amazoncryptocurrencies.com.

Regard their reasons for buying, they simply stated they had no plans to accept the payment because the demand wasn’t there. So logically speaking, if demand gets there, they will start having plans to accept it! Well, with Square and PayPal opening up to the payment form I predict this will change. It’s only a matter of time until Amazon lets you pay for goods using Bitcoin.

Buy Bitcoin to Diversify Your Portfolio

The last reason why you should invest in Bitcoin is for diversification and improved returns. We’re at a point with cryptocurrencies that they now belong in every diversified portfolio to some degree. Indeed, even if you’re a die hard skeptic, you still need some. Regarding their future, they are not going away and time soon. Furthermore they are an uncorrelated asset which means they can assist your portfolio even with just a small allocation. This means they can improve portfolio returns and also reduce your portfolio volatility because they don’t move in lockstep with stocks or bonds.

Okay, How Much Should I Invest in Bitcoin?

How much money should I invest in Bitcoin? How much of my portfolio should I allocate, as a percentage of total assets, in cryptocurrencies? For this answer we turn to some authorities on the subject and it just so happens that Yale University did a study.

Yale’s Recommendation on How Much Bitcoin to Buy

The Yale economist Aleh Tsyvinski recommends that Bitcoin should occupy 6% of every portfolio in order to achieve optimal construction. Even those who are strong bitcoin skeptics should maintain 4% BTC. The study indicates that even the staunchest opponents of the cryptocurrency world are best off investing 1% of their assets in this space, if only for diversification purposes.

However, before you act on this, please continue reading and finish the article. Below, I summarize eight authoritative recommendations in a nice chart for you.

On top of this, they practice what they preach. Because In 2018, Yale dipped its toes into the cryptocurrency space by investing in a $400M fund called Paradigm. You can read more about that here. Paradigm aims to invest in early cryptocurrencies, blockchain technology and exchange projects. Let’s pause here for a moment, Yale not only started invest in crypto, but dove headfirst into deep end by allocating capital to the riskiest segment of Crypto!

Similar Recommendations from Arizona State University

Next, Dragan Boscovic of Arizona State University came to the same conclusion as Yale. He notes, “Institutional investors are recognizing this new asset as a valued investment opportunity; this will encourage individual investors. It will also encourage consumers and small shops to start trading in cryptocurrency.” So, with this in mind, we have two great scholarly recommendations acknowledging the opportunity for investors.

Any Other Recommendations?

But do you have any other recommendations to reference? Of course I do! In fact, all other major university endowments are investing heavily into cryptocurrencies: Harvard, Stanford, and MIT have all indicated they are in. They have all indicated that some portion of their endowment is directly invested in Bitcoin or the underlying technologies like blockchain or exchanges.

Industry Recommendations On How Much Bitcoin to Buy

Links to the various sources listed above: CNBC, Steemit.com, Forbes, BitcoinInsider.org, Yale Study, Seeking Alpha, CryptoNews.com, MarketWatch.com.

Things to Know Before Investing in Bitcoin

I hope by now you are seriously considering investing even a small portion of you portfolio into Bitcoin. However, there are some things you need to know first, so you’re fully aware of some of the risks and counter arguments against the currency.

Power Consumption

Firstly, the Bitcoin network requires a massive amount of electricity to run. It is estimated that it currently consumes 63.32 TWh or terawatt-hours which is the equivalent of 7 nuclear power plants. Not only this, but in the age of energy conservatism and environmental awareness, there serious risk that environmentalists target this and demand improvements.

Guard your Bitcoin Private Keys

Secondly, and most importantly, every bitcoin wallet has 2 keys: a public and a private key. Your public key is what you send someone when you want to receive Bitcoin. Money can only go in and cannot go out through your public key. This means you are fine to share your public key with anyone. However, the private key is a completely different story, as this gives control over the Bitcoin funds within your wallet. Your private key is what you use to send and spend Bitcoin by proving ownership of funds. In summary: never give out your private key.

If you’re looking for a wallet you can take offline, try the best one available now:

Hacking the Blockchain

Thirdly, many attempts have been made to falsify and edit a block in the bitcoin. In other words, many have tried to hack the blockchain ledger. Hacking attempts on exchanges is to gain access to the private keys stored there so they can send your bitcoins to themselves. However, hacking the blockchain is an attempt to falsify records or enable double spending.

The blockchain itself is extremely difficult to hack because modifications and new transactions are only allowed through consensus across the entire network. Falsified blocks are extremely easy to detect and reject because consensus will not be met.

This article is really good at explaining just how difficult it is to hack the blockchain. In summary, this risk is highly unlikely however it is good to be aware of; google “51% attack” if you would like to learn even more.

Hackers – Exchanges

Fourthly, it is a different story on the exchanges where you buy and sell bitcoin. Because these are standalone websites or smartphone apps and not a distributed blockchain network. Of course, they interface and put transactions onto the blockchain, but that is all. So, please do not confuse an exchange with the blockchain. Comparatively speaking, a Bitcoin exchange is more similar to an online bank or money transfer website than anything else.

So, when a hacker gains access to the exchange, they quickly grab as many private keys as possible and begin sending bitcoins to their own wallet. Follow these steps to secure your bitcoin on an exchange:

Choose a difficult and strong password unique to that exchange and do not use it anywhere else
Enable Multi-factor or Two-factor authentication to supplement your strong password
Use a Hard wallet as described earlier and load the bitcoins onto it and secure the wallet in a safe place.

Eight Solid Tips for Cryptocurrency Investors

Lastly, and before you jump into bitcoin investing, give this great article from Forbes.com a read which gives Eight Tips Every Cryptocurrency Investor Must Know

Summary

In conclusion, Bitcoin offers an incredible and promising investment opportunity. We’ve covered four reasons why you should invest in Bitcoin: it is a decentralized, deflationary currency that is being widely adopted by corporations, payment facilitators and large endowment funds. In addition, it has shown to actually improve a diversified portfolio by increasing returns while lowering volatility. So when I’m asked, should I invest in Bitcoin? My answer is an enthusiastic yes. It’s a terrific asset that belongs within every diversified portfolio.

My Personal Investment Approach for Bitcoin

Regarding my personally approach, I currently hold 2% of my portfolio in Bitcoin. When it rises I sell it to bring my risk exposure back to 2% and when it dips I buy more. So you can see my approach is super simple and without emotion. Because of this, I don’t get caught up in the massive runs or dips and just execute my plan with confidence.

In the end, I hope this article has given you a lot to think about when it comes to Bitcoin. Please, if you have any questions, reach out to me by email, Twitter or Facebook; links to all of these are found below.

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