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If anyone knows anything about volatility, it’s those who own cryptocurrencies. in particular, Bitcoin (BTC -0.91%) It’s been a real roller coaster over the years. Bitcoin’s price has fallen more than 30% from its peak twice and more than 60% once in the past five years alone.
But if I had bought it 5 years ago, I would have been pretty happy with it. I held you forever. His $1,000 investment in Bitcoin five years ago has now grown to more than $13,000.
So what is the lesson here? And how can investors apply it to Bitcoin going forward?
Here’s what you need to know:
Why is Bitcoin so volatile?
Bitcoin and other cryptocurrencies have some similarities to stocks. First, short-term prices are determined by supply and demand. If more people want to buy than sell, the price will rise, and vice versa. But stocks represent the underlying company, a concrete business. They generate profits, and shares represent ownership of a portion of it.
Cryptocurrency is a bit complicated because technically it doesn’t exist. tangible Cryptocurrency value. That doesn’t mean it’s not worth it. After all, the same can be said about fiat currencies. Its value is determined by what it represents. In the case of the US dollar, the currency represents a fiat currency backed by the government. While the value of the dollar can fluctuate relative to other currencies, the U.S. dollar is generally stable due to its backing. As such, it is the world’s reserve currency.
Bitcoin is decentralized and no banks or governments back it. Because of this, some may argue that Bitcoin and other cryptocurrencies have become a pyramid scheme, but that is not necessarily true. Decentralization is both a bug and a feature. Bitcoin is still a young asset. It is not as widespread as fiat currency and therefore less stable. But the more people own and trade it, the more stable the price is likely to be.
What determines the long-term value of Bitcoin?
Over time, Bitcoin’s value will return to supply and demand, but on a much larger scale. In theory, the demand for Bitcoin will increase as its adoption increases. The more people own and use it, the more people will want it.
The interesting part is the supply side. With fiat currencies like the US dollar, the Federal Reserve controls the money supply. It may go up or down, but the supply will almost always increase, as shown below. This is measured as the M2 money supply, or the total number of dollars in circulation in the economy.
US M2 Money Supply Data by YCharts
The more dollars there are in the economy, the more demand there is for goods and services, which causes prices to rise. Specifically, inflation refers to the purchasing power of the dollar. Decrease. In other words, today a dollar is not bought as much as it was 50 years ago. Compare house prices in 1960 to today’s prices.
Bitcoin was created with a hard supply limit of 21 million Bitcoins. It can never be more than that. There are currently approximately 19.6 million Bitcoins in existence. The last Bitcoin is expected to be mined in 2140. The idea is that Bitcoin’s purchasing power increases rather than decreases over time. why? This is because there is a limit to the number of Bitcoins that can meet the ever-increasing demand. That purchasing power should ultimately increase its value.
How should investors buy Bitcoin today?
Volatility makes timing Bitcoin and other cryptocurrencies a near-impossible task. However, Bitcoin has continued to increase in value over time, just as its creators intended. Even though Bitcoin prices are down nearly 30% from today’s highs. S&P500 At all-time highs, Bitcoin has risen far more than the entire stock market over the past decade.
Investors should not own Bitcoin for speculation, but because they believe in Bitcoin’s purpose and long-term potential as a fiat replacement.
Bitcoin price data by YCharts
Consider purchasing Bitcoin using dollar-cost averaging. Regardless of price, you buy a little at a time, often on a schedule. Over time, you may end up buying at higher or lower prices, but it averages out. That way you don’t end up putting in all your money at the wrong time.
Despite occasional wild price fluctuations, stable purchases and long term horizons should allow investors to enjoy Bitcoin’s success.
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