One of the hottest investment trends right now is Bitcoin. With the price above $63,000 as of this writing, Bitcoin has captured the imagination of many investors. However, just because something has a high price and has seen a huge increase in a short period of time doesn’t mean it’s the right investment for you. So, is Bitcoin a good investment? In the end, it depends on your goals and where you think the future lies. But let’s unpack how you can decide whether should you invest in Bitcoin.
Why Is Bitcoin Rising in Price?
Many people are interested in Bitcoin due to recent price increases. Bitcoin, which trades using the ticker symbol BTC on exchanges, has seen a dramatic increase in price over the last couple of months.
Part of the reason BTC is seeing a surge in price is its increasing popularity among institutional investors. A report by bank UBS hailed 2020 as the year of the institutional investor, where more institutions were involved in buying Bitcoin and related crypto assets compared to 2017 — the last time Bitcoin saw such a huge runup.
Bitcoin’s popularity has surged as more people learn about it and more high-profile people talk about it. In fact, BTC got a bump after Tesla (TSLA) purchased $1.5 billion in Bitcoin and the company announced that would accept payment for its cars in the cryptocurrency.
But is Bitcoin a good investment just because of a rise in price?
Factors to Consider Before Buying Bitcoin
If the question you’re asking yourself right now is Should I buy Bitcoin? there are a few things to consider.
1. The Price Is Already High
Because of how dramatic the price increase has been in recent months, it might not be the best time to get in — especially if you think BTC is in a bubble. Some experts think that there’s a greater chance of Bitcoin crashing in the coming weeks than it going significantly higher.
With a price already near historic highs, there isn’t much room to improve before Bitcoin potentially crashes. However, that doesn’t mean now is a bad time to invest. Some industry watchers predict that BTC will hit $100,000 by the end of 2021. If you agree with those predictions, now is still a good time to get into Bitcoin. This is especially true since there are some exchanges, such as Robinhood, that allow you to buy fractions of a Bitcoin, so you don’t need more than $50,000 to invest.
However, you have to be prepared for a crash — and to lose your investment — if Bitcoin doesn’t live up to the lofty predictions and instead drops dramatically below current price levels.
2. Real-World Usage Isn’t Widespread
It might seem impressive that about 2,300 businesses (including Tesla) in the United States accept Bitcoin, according to a Fundera report. In truth, there really aren’t that many businesses using Bitcoin. Even though thousands of transactions are made in Bitcoin each day, the platform is often considered clunky.
It’s also worth noting that about 95% of the coins in existence are held by only 2.5% of wallet addresses, according to UBS. As a result, it’s a reasonable conclusion that there is more hoarding going on than actual usage. Instead, BTC is seen more as a store of value than a medium of exchange. Open-source blockchain platforms like Ethereum have more utility, with the ability to execute smart contracts and a faster transaction time.
Depending on how you like to invest, other crypto assets may be available to meet your goals — especially if you’re interested in the underlying utility of blockchain and less interested in the actual coins.
3. Tax Reporting Can Become Burdensome
It’s important to note that cryptocurrencies like Bitcoin are treated as property for tax purposes. As a result, you need to keep track of your cost basis when you purchase Bitcoin, and pay attention to any gains you end up with when you sell — or when you use Bitcoin to make a purchase.
Any increase in value has to be reported as a capital gain and will be treated as such, depending on how long you’ve held it. Additionally, if you receive Bitcoin as payment for a product or service, you need to acknowledge its market value and count that as income. If you’ve received Bitcoin as a result of mining, that counts as income.
However, depending on where you buy and sell BTC, you might not receive basis and gain information from the exchange, so it’s up to you to properly calculate your gain or loss. The IRS has started including cryptocurrencies on its tax forms, so it’s important to consult with a tax professional to ensure that you’re properly reporting your holdings, income, and realized gains. This might be burdensome enough that you might not want to mess with BTC as an investor.
4. What Are Your Portfolio Goals?
Don’t forget to consider your own portfolio goals when deciding whether to invest in Bitcoin. When considering your risk tolerance, it’s important to take into account the risk vs. reward of Bitcoin. With current high prices, you might end up with a bigger risk by starting now — especially if you devote a large portion of your portfolio to the cryptocurrency. But if you’re looking to add a bit of growth and can afford to take the risk, it may be worth owning a small portion of Bitcoin.
When investing for long-term goals like retirement, it might make more sense to use a more traditional asset allocation of stocks and bonds for the biggest portion of your portfolio and keep less than 5% in riskier investments like Bitcoin. Bitcoin can add a little diversity to your portfolio without taking it over, as long as you are strategic about what you include.
Carefully review your goals to see if it makes sense to add Bitcoin to your portfolio. Don’t invest more than you can afford to lose. Crypto assets are risky because they are a relatively new development. It’s important to limit your potential losses by capping how much of your total portfolio is invested in Bitcoin.
Bottom Line: Is Bitcoin a Good Investment?
Deciding whether or not to invest in Bitcoin right now depends on if you think there’s still room for Bitcoin to increase in price, as well as if the cryptocurrency makes sense in your portfolio.
Bitcoin remains highly priced and there’s a chance that there could be a crash before the next big price increase. If you believe that the risk of a big drop is higher than the potential reward of another price surge, it might make sense to hold off and find other assets for your hard-earned cash.