Bitcoin as an investment

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This page discusses the case for owning bitcoin as an investment and store of value.

The case for investing

  1. There is a fixed supply of bitcoins. There will never be more than 21 million bitcoins.
  2. Because of bitcoin's useful properties as a medium of exchange, demand is growing or at least staying the same.
  3. Fixed supply and growing demand implies a growing price.

Store of value

Bitcoin has useful properties to make it a good store of value. It has been described as a "swiss bank account in your pocket"[1].

Even if these properties are not useful to you, they may be useful to others which would benefit you by increasing the value of your held bitcoins.

Useful notes

Difficulty with storing and theft

Because bitcoin is a digital asset, it can be un-intuitive to store safely. Users should definitely read the guides for correctly storing bitcoins. Historically many people have lost their coins but with proper understanding the risks can be eliminated. If your bitcoins do end up lost or stolen then there's almost certainly nothing that can be done to get them back.

Preserving these properties

Bitcoin is a software project. There's an obvious question of how it's useful properties can be maintained. Couldn't some programmer simply edit the source code to create more than 21 million bitcoins? The answer turns out to be no. Bitcoin is secured by strong cryptography and game theory, and it's properties are very hard or impossible to change.

See also:

Some people say that although the supply of bitcoin is limited, an infinite amount of other cryptocurrencies (altcoins) can be created. This is fundamentally confused reasoning because bitcoin and altcoins are different currencies, as bitcoin wallets would reject altcoin payments and vis versa. Claiming altcoins dilute the supply of bitcoins is like saying hyperinflation of the Venezuelan currency dilutes the supply of US Dollars.

Volatility

Bitcoin is much more volatile than most other assets, including most volatile commodities. This can be be good when the price is rising but may hurt the dollar value of your holdings when the price is falling. One way to deal with this is to only hold a certain percentage of your savings in bitcoin and the rest in more stable assets, but does not eliminate the risk altogether.

You could hedge yourself with Bitcoin futures or Bitcoin options, at the cost of accepting some counterparty risk. Most of the Bitcoin futures and options exchanges are centralized and you have to trust them with your coins. This however allows you to use your coins for payment and not worry about their dollar value. When using options, you also can enjoy the upside (at the cost of the option).

You could also deal with it by studying bitcoin's fundamentals deeply so that temporary price drops do not scare you into selling low. Investing with a dollar-cost-averaging strategy can also reduce the effects of volatility[2]. Also, over time, as your holdings grow, the impact of the new purchases is smaller and the volatility affects your increasing holdings.

Uncorrelated asset

Although bitcoin is volatile, it is mostly uncorrelated with any other asset classes[3]. This means bitcoin can reduce the overall volatility as part of a well-diversified portfolio.

See also

References