Firstly, Investors should not risk money they cannot afford to lose in the digital currency. Secondly,Investing in bitcoin is not like investing in stocks and bonds.
Investors buy stocks and bonds because they bring in future cash flows, interest and principal income in the case of bonds and dividend for stocks, and capital gains from a possible increase in price in the future.
Well, you may argue, there are firms who never pay dividends, many of the tech companies, and bitcoin is kind of like them, where capital gains are the sole driver of returns. But here’s the essential difference: the future price of non-dividend paying stocks are backed by the company’s potential to grow its profit.
It has cash flow, whereas bitcoin has none. The only thing it can offer is the belief that someone will be willing to pay more for it in the future.
Should you invest in bitcoin? Here are some details a potential investor should know:
First of all, bitcoin is one of about 1,500 digital currencies available and is most well-known since it has the largest market cap. Bitcoin was created to undermine the bank-dominated financial system and to streamline capital market activities.
It was “mined” via supercomputers by programmers incentivized by an award of bitcoin, mostly located in areas like Inner Mongolia and Ireland, wherever electricity is cheap.
Bitcoin’s price is determined solely by supply and demand. On the supply side, unlike the dollar, whose supply is controlled by the monetary policy of the Federal Reserve Bank, bitcoin’s supply is pre-programmed by its creator.
How risky is investing in bitcoin compared to other financial assets?
If the belief in bitcoin evaporates, it will free-fall and should be avoided as an investment tool. Go into bitcoin if you can bear the downside, but do not buy looking to strike gold. If you are fine with losing all your capital and you are curious about bitcoin, and you believe that the demand for bitcoin is still going strong, then do it.