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].

  • As mentioned before, the controlled supply means your held bitcoins can't be debased.
  • They take up no physical space so any amount can be stored.
  • You do not need to pay anything for storing the Bitcoins.
  • They are easy to hide. They can be stored encrypted in your computer, on a paper backup or even memorized in your brain.
  • The transactions can be made anonymous, meaning nobody would even know you own bitcoins or how many.
  • Because of this they can be made impossible to steal or seize by any thief, government or bank.
  • The coins can be sent anywhere in the world without being blocked.

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.

It's important to realize that if you keep the private key of a bitcoin secret and your transaction has enough confirmations, then nobody can take the bitcoin from you no matter for what reason, no matter how good the excuse, no matter what.

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:

Volatility

Bitcoin is much more volatile than some other assets. This can be good when the price is rising but bad 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. 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].

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

  1. https://www.reddit.com/r/Bitcoin/comments/4a2l55/obama_meme_bitcoin_is_like_having_a_swissbank/
  2. https://breadwallet.com/blog/how-invest-bitcoin-without-getting-hurt-volatility/
  3. http://www.signalplot.com/what-is-bitcoins-correlation-with-other-financial-assets/