Since the launch of the cryptocurrency in 2008, the price of a single Bitcoin has significantly increased, with significant ups and downs along the way. In April, it reached an all-time high of almost $60,000; since then, it has fluctuated.
Despite the volatility, investors are still interested in Bitcoin because of its track record of steadily increasing and sustaining value. It can be challenging to determine the value created by a decentralized, digital currency with such a limited history, as opposed to a stock, which has value because it represents a portion of ownership in a company, or even a bond, which reflects the value of a loan you’ll be repaid upon maturity.
These fluctuations certainly spook investors, but they also raise the question of why Bitcoin is valuable in the first place.
Why Does Bitcoin Have Value?
Briefly put, according to Bryan Routledge, an associate professor of finance at Carnegie Mellon University’s Tepper School of Business, Bitcoin is valuable “because people believe it to be valuable.” And if that sounds a little erratic and absurd, that’s because it is.
The belief that Bitcoin will one day be worth more than it is today drives up demand for it, and like gold, its value keeps rising.
Kiana Danial, author of “Cryptocurrency Investing for Dummies,” claims that gold is simply dirt that has worth to people because they decided that it has value. Humans place that value on things like gold and your $100 cash. The $100 bill itself has no intrinsic worth. That value is what we give it.
Similar to gold, you can acquire Bitcoin and possess it, even if you can’t normally use it to make a direct purchase at a store. But gold has a quality that Bitcoin does not, at least not yet: it has a considerably longer history, and as a result, its long-term value has been repeatedly demonstrated.
What you really want to know is: Will your Bitcoin still be acknowledged as a Bitcoin in a year?, argues Routledge. According to Routledge, the answer to that question depends on the prospects for blockchain technology and the conviction that this technology will continue to gain widespread acceptance.
What Should Investors Know?
It’s wise to just invest a small portion of your total assets in Bitcoin because its price is highly volatile and it’s impossible to predict whether it will continue to appreciate in value or fade into oblivion. Like any other speculative investment, experts advise keeping bitcoin investments to less than 5% of your whole portfolio. Additionally, avoid sacrificing other financial objectives, such as preparing for retirement or maintaining an emergency fund, by investing in cryptocurrencies.
According to Galen Moore, director of data and indexes at cryptocurrency news site Coindesk, consumers purchase Bitcoin “not because they anticipate to be able to walk to the store and spend it, but because they want it to keep its value,” according to a recent interview with NextAdvisor.
However, there are thousands of alternative cryptocurrencies; Bitcoin is just the most well-known. Other cryptocurrencies have distinct factors that investors should take into account.