Volatility isn’t always bad, and it’s important to be cautious about applying leverage
Bitcoin is a new currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto. Transactions are made with no middle men – meaning, no banks! Bitcoin can be used to book hotels on Expedia, shop for furniture on Overstock and buy Xbox games.
Bitcoin has become an asset class of great interest to many investors and speculators across the world. But recently a few leading asset managers have recommended that investors direct a small allocation of their capital to cryptocurrency as part of their investments and retirement savings.
“Bitcoin is neither intrinsically valuable, nor is it a reliable store of wealth,” said Stuart Trow, a credit strategist at the European Bank for Reconstruction & Development, in a Bloomberg Opinion article. “It certainly does not produce an income. It does, however, possess two characteristics that could make it a good fit for even the most conservative portfolio”…volatility and it is not leveraged.
Volatility
Many investors and financial advisors view Bitcoin’s volatility with horror. Between Dec. 2017 and Dec. 2018 the price of Bitcoin fell by almost 85%. But since that meltdown it has risen more than tenfold, demonstrating that volatility can cut both ways. The greater an investment’s volatility, the larger the losses but the larger the potential returns.
FOMO. Their friends. The future. These are the reasons why new investors are buying Bitcoin https://t.co/wbs2wKLkyM
— Bloomberg Wealth (@wealth) January 25, 2021
Bitcoin’s volatility offers a greater possibility of meaningful gains, while committing a relatively small, manageable sum. Since over the past year, its price has more than quadrupled. Had you invested one percent of your capital to Bitcoin, it would have contributed much to your portfolio. Thanks to Bitcoin’s volatility, as long as you don’t bet the ranch, there remains the possibility of making a real gain without too much loss.
Leverage
Bitcoins other key characteristic is that it is not a leveraged investment. Unlike leveraged trading strategies, which traders apply leverage (or debt) to trading financial instruments such as option and future contracts, your losses with Bitcoin are limited to your initial stake. Most other get-rich-quick schemes, including contracts for derivatives, rely on debt to some degree.
Bitcoin is worth $34,000 because other people will pay you $34,000 for it. There is no underlying claim.
It is an amazing collective accomplishment to create a new thing, from scratch, that is valuable just because we collectively agree that it’s valuable https://t.co/HDFL1zocf5 pic.twitter.com/yICX2gRWSe
— Bloomberg Opinion (@opinion) January 25, 2021
Fear of Missing Out (FOMO)
“Fear of missing out” and viewing cryptocurrencies as an alternative safe have to gold were just a few of the reasons that were heard when new Bitcoin investors were asked to explain their purchases in a month when the cryptocurrency had reached historical record highs. Especially when conventional investing wisdom would advise against buying the elevated prices, and these investors knew that the cryptocurrency might lose value.
Yet, Bitcoin is not for everyone, as underlined by its recent short term $10,000 fall in early January 2021. But, if you have a couple of dollars that you can afford to lose, there are probably worse things to buy right now than the world’s most popular cryptocurrency.
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