This is issue #031 of WTF is going on with the Economy?! where we explore what’s happening with Bitcoin today (late 2020). Get this newsletter in full right when we publish. Sign up now.
Cryptocurrency enthusiasts are partying like it’s 2017.
Back then, Bitcoin (or BTC) saw its value shoot up astronomically.
At the time, it captivated the media’s attention, brought in all sorts of amateur investors, minted millionaires, and, eventually, ruined lives.
After a seemingly unstoppable rocket trip up, the bubble burst, sending the price of Bitcoin and other cryptocurrencies back down to earth.
In the ensuing years, they struggled to regain much ground.
Even in the aftermath of the global economic meltdown this past spring, Bitcoin and its peers failed to make a long-heralded rally.
Over the past few months, though, that changed.
Bitcoin has made an epic comeback.
Just yesterday, it passed its all-time high record set three years ago, and once again, it’s stealing hearts and minds around the financial.
Neat, right? But you might be asking yourself:
“So um, what is Bitcoin?”
Great question! No one really knows.
It was initially conceived as a digital alternative to money real money (or ‘fiat’ as it’s sometimes called) staying outside any government’s control.
Instead, transactions take place without a central bank on what’s known as a decentralized ledger.
Furthermore, there’s a finite supply of Bitcoins. Once they’re all “in the wild,” then no new ones will exist.
In turn, Bitcoin’s value remains intact (since there can’t be inflation) and outside the reach of any single authority.
At least that’s what it is on paper. Other cryptocurrencies follow similar logic with a bit of variation in their rules and setup.
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What do investors do with Bitcoin?
Bitcoin’s original goal was to replace real money.
To that end, people would purchase BTC to buy and sell (illegal) stuff online.
The concept took off, and the novelty of BTC fueled the first bubble.
Today, investors see a different and more traditional use in cryptocurrency.
For one, they see it as a store of value.
Like gold, there’s only a finite supply, meaning that, in theory, it’s an attractive place to keep your money safe during economic turbulence.
Second, investors are now seeing cryptocurrencies as a long-term alternative investment.
Alternative investments — like real estate, artwork, and premium booze — operate differently than stocks, bonds, and cash, making them useful for diversification.
What’s different today than in 2017?
Three years ago, investors were more attracted to the novelty of BTC than its usefulness.
Was it a viable replacement for cash? The future of the economy? A one-way ticket to the moon?
It turns out, none of that was true.
However, some big names in finance like Goldman Sachs and other private equity funds saw some potential, buying cryptos while they were cheap.
Many investors viewed the banks’ position as a blessing.
In turn, attitudes shifted, with investors seeing BTC and other cryptos as less of a payment medium and more traditional investment.
Combined with a crazy global economy, investors jumped back onboard.
Now, BTC continues to pass all-time highs, with no end in sight (for now).
Should I invest in Bitcoin (or other cryptocurrencies)
Unfortunately, I can’t answer that for you in a newsletter because of the hundreds of readers (and growing!). Each one of you is different.
You have your individual goals and risk tolerances, making it impossible for me to give you a definitive answer ethically.
On that, though, here are some pointers to keep in mind.
- Never put all of your money into Bitcoin (or even one single investment). Diversification is vital no matter what you’re doing investment-wise. Unless you’re ready to ride or die with that one asset, spread your risk around
- Don’t invest more than you’re willing to lose with a speculative, high-risk investment like Bitcoin. Sleeping and eating well are key to healthy living. Getting in over your head with any investment is detrimental to those goals.
- If you’re going to invest, make sure that whatever platform you use, it’s legitimate. There are a lot of opportunistic scammers out there who will take your money and disappear. Do your homework.
- For the love of everything holy to you: do not put your emergency fund or savings you need immediately into any cryptocurrency (or stock/stock fund, for that matter). You need that cash ready at a moment’s notice. Yeah, savings accounts lose a tiny bit of value these days, but it will preserve your money in a way no volatile asset cannot.
It’s impossible to say what will happen soon, either with cryptos or any asset.
However, as the saying goes, history might not repeat, but it does rhyme.
Time will tell if the prose is different in 2020.