The price of Bitcoin in terms of the US dollar quadrupled last year; in quarter fourth, it appreciated 160%. This blazing rise has attracted media and investor interest. Moreover, many payment platforms like PayPal, Square and BitPay have already started accepting digital currencies. More exchanges are coming up for Bitcoin and Altcoin trading. In the last five years till 31st December 2020, the S&P index of five hundred large-cap listed US stocks has exhibited an annual growth rate of 14.5% (net dividend reinvested). On the other hand, Bitcoin has shown an annual growth rate of 131.5% over the same period.
Some market analysts have cited cryptocurrencies to be an excellent hedging tool to gold from an investment perspective. For instance, the S&P500 index declined seventeen out of sixty months until December 2020, against the seven-month rally of Bitcoin. In the previous five years ending December 2020, a portfolio with 10% Bitcoin allocation and 90%
in S&P500 would have produced compound annual growth of 26.8%.
The edge
The maximum cap for Bitcoin is twenty-one million coins, out of 18.5 million coins that have been already mined, leaving less than three million coins to come into circulation. The production rate of Bitcoin slows over time, a phenomenon known as halving. In 2009 value of each block was fifty Bitcoin; now, it has diminished to 6.25 Bitcoin per block.
The Global Financial Crisis of 2008-2009 compelled global banks to take unconventional banking measures, especially large scale asset acquire. After giving a huge bailout, government resources were dwindling. Some analysts think there will be a significant devaluation of fiat currencies linked to the inflation rate. Cryptocurrencies are alternatives not influenced by inflation, hence a good investment tool. Some market observers claim the digital payment process witnessed around $4billion transaction value in 2019. Factually more Bitcoin e-wallets were created last year. As of January 2021, there are about sixty-five Bitcoin e-wallets.
Timing is crucial
The annualized volatility rate of Bitcoin news in the preceding five years is about 90%. On the other hand, the annualized volatility of thirty days per cent change in S&P500 and gold is 15.3% and 13.4% correspondingly. Volatility has a major impact on the return of capital; the maximum and minimum return of Bitcoin over the last sixty months was 76.1% and -37.6%, respectively. The timing of investment regarding Bitcoin is crucial.
It is correct, the supply of Bitcoin is limited to twenty-one million, and other Altcoin have specific cap inbuilt in their protocols. But nothing can stop the emergence of new cryptocurrencies; hence the potential source of digital currencies is fathomless. It is worthy to note some central banks comprehend to launch their digital currency, which could steal some limelight from cryptocurrencies.
Though many digital payment platforms accept Bitcoin and other cryptocurrencies, there are few outlets where you can barter cryptocurrency for real goods and services. The intrinsic volatility of Bitcoin makes them a poor store of value; the exchange rate with fiat currency fluctuates widely, even on an intra-day basis. Furthermore, cryptocurrencies are privately mined with no government regulation or supervision. This gives ample leeway to criminals as a means to scam investors. A survey conducted in 2019 exhibits 25% of Bitcoin users are involved with illegitimate activities, and 46% of Bitcoin transactions are associated with criminal activities.
