In the past few months, bitcoin holders have witnessed its insane leap forward. From a high it reached in mid-April, its price has dropped more than 50%, shrinking its market capitalization by $ 500 billion. Due to this significant price drop, many investors are wondering: is now the right time to buy bitcoin?
Before making any hasty decisions on this front, investors should carefully consider the pros and cons of owning this cryptocurrency.
- On the one hand, the scarcity of Bitcoin is the reason for buying it.
- On the other hand, its volatility is the reason to stay away from it.
Arguments in favor of buying bitcoin
Bitcoin is an electronic money system powered by blockchain technology. At its core, blockchain is a type of distributed database capable of revolutionizing the financial industry. In particular, blockchain relieves traditional financial institutions (such as banks) from the need to keep records and greatly facilitates transactions.
This technology relies on a distributed network of computers to manage transactions, mint new tokens, and keep the ledgers to keep Bitcoin safe.
Ultimately, this means transaction fees are sharply reduced and cross-border transactions are speeded up, creating a more efficient financial system. These are the main points that distinguish Bitcoin and other cryptocurrencies from traditional (fiat) currencies.
Bitcoin is currently more popular than any other cryptocurrency. It became the first widespread digital token since its launch in 2009 and remains the most popular cryptocurrency (in terms of active addresses) and the largest cryptocurrency (in terms of market capitalization) to this day. Additionally, Bitcoin has gained widespread acceptance in the past few years as fintech companies such as PayPal, Square, and MercadoLibre have integrated it into their platforms.
However, the most compelling case for bitcoin comes from its scarcity. In particular, the computer code behind it limits the total number of tokens that can ever be mined to 21 million bitcoins. Once this limit is reached, which is expected to happen around 2140, it will be impossible to create any more bitcoins. In addition, each next block of cryptocurrency requires more computing power for its creation. All of this makes Bitcoin a kind of digital equivalent of gold or silver in the sense that the value of both is highly correlated with their scarcity and limited reserves.
Ark Invest CEO Katy Wood recently expressed her belief that bitcoin’s value will eventually rise to $ 500,000 – about 14 times its current price. Given Katie Wood’s reputation as one of the most successful Wall Street players, investors might want to heed her opinion.
Arguments against buying bitcoin
One of the most compelling arguments against buying bitcoin is its volatility. Over the past 52 weeks, the token price has fluctuated from a high of $ 64,800 to a low of $ 9,100. Moreover, it recently lost half of its value in just two months, and such wild swings are nothing new to cryptocurrency. For example, in 2018, investors saw an 80% drop in the bitcoin price (from $ 17,500 in January to $ 3,200 by December). This type of volatility makes Bitcoin a very risky investment.
Bitcoin skeptics also cite the extremely energy-intensive mining process as an obstacle to mainstream adoption. Indeed, research from the University of Cambridge shows that the amount of energy consumed annually when mining bitcoin is 67 terawatt hours (TWh). This is approximately 0.27% of all electricity generated in the world per year. What would you understand the scale is more than is required to supply all of Austria with electricity.
Finally, Bitcoin is far from the only blockchain-based cryptocurrency that can successfully compete with the traditional financial system. There are thousands of others, and many of them, such as Ethereum and Polkadot, are more useful than Bitcoin because they incorporate smart contracts and decentralized financial applications into their structure.
There are good arguments on both sides of this debate, but personally, I tend to agree with Katie Wood’s opinion. While I probably wouldn’t go with a target price of $ 500,000 per bitcoin, overall I believe it is a truly unique asset.
As the original and most popular, this cryptocurrency definitely has an edge over other digital tokens. And by eliminating the need for centralized oversight from governments and financial institutions, it compares favorably with fiat currencies. Over time, these unique aspects should drive the demand for Bitcoin. And given its limited supply, growing demand should eventually drive up the price.
Review from 07/15/2021 (based on The Motley Fool)
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