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WHEN TO INVEST IN BITCOIN
The question of when
to invest in a valuable asset is age-old. Bitcoin and other cryptoassets are
somewhat notorious for their volatility and bubble-like boom and bust.
While no one can
provide an answer for when to invest in Bitcoin, there are some good benchmarks
or waypoints for evaluating Bitcoin’s investment potential.
Time: As mentioned earlier, Bitcoin has been
around for a decade. In that time the network has grown to cover the world. The
number of active nodes and the number of bitcoin wallets in existence has
increased, while the value of bitcoin’s currency has grown from $0 at the
beginning of 2009 to several thousand dollars by 2019. (So far, BTC’s all-time
was achieved on December 16, 2017, when the price touched $19,665.39).
So in less than ten
years, the price of one bitcoin has ping-ponged between $0 and nearly $20,000,
making a historic run that attracted a lot of attention to the asset’s
underlying volatility. During the past 10 years, bitcoin’s market run has not
been linear. Instead, the growth of bitcoin both from a general user
perspective and from a market perspective has followed a cyclical pattern of
runs and retreats. Ideally, investors secure positions before dramatic market
runs and then make decisions about profit-taking at the market peak. This
strategy is not only true with bitcoin and cryptocurrencies, but with all kinds
of investments and asset classes. So the question about “when is the best time
to buy bitcoin” is best answered by trying to figure out where the asset is in
the timeline of price movement. Of course, if people knew that then investing
would be a lot easier.
There are a few things
to consider when trying to figure out bitcoin market timing. These are just for
consideration and they are not the basis for any kind of investment decision:
1.
1.
There will only ever
be 21 million bitcoin ever produced. Now, this doesn’t exactly tell the whole
story, because as you might remember from reading earlier, each bitcoin can be
divided by 8 decimal places, but the fact that Bitcoin has a set schedule for
creation (the final bitcoin will be mined in 2140) and that there is no entity
that can change to underlying Bitcoin network numbers means that it is a
deflationary currency and that as time goes on it will become more scarce, and
likely more valuable.
2.
From studying previous
technological shifts we know that there are distinctive ways of tech adoption:
Innovators, early adopters, early majority, late majority, and then the
laggards. This cycle has happened again and again and is particularly
applicable to internet technologies and products. Depending on where you think
Bitcoin is in the technology adoption cycle should help guide potential
investment decisions. While identifying the exact phase of Bitcoin’s trajectory
is difficult, by all accounts, the Bitcoin network and the bitcoin currency are
still in the pre-mass adoption phase. Important milestones on the technology
adoption curve include the innovator phase, the early adopter phase, early
majority phase, late majority phase, and then the laggards.
3.
Network effect:
Bitcoin benefits from a network effect. This effect will impact future growth
in two ways. The first impact of the network effect is that new growth fuels
future growth. Just like the way social networks grow — new users
invite other users to interact with — new Bitcoin users help convert
other users so that they can share value over the network. Since Bitcoin’s
total addressable market is the whole world, there is really no limit to the
potential spread of the network other than basic infrastructure.
4.
Competition: Bitcoin’s
network effect also works to keep it competitive in the crypto market place. As
mentioned earlier, Bitcoin is the oldest cryptocurrency and enjoys a
first-mover advantage, but it also has a very active developer community (not
to mention its solid design foundation) which means that Bitcoin coins to be
number one cryptocurrency by market capitalization. The longer Bitcoin stays in
this position, the more it reinforces its dominance. Ethereum is the
second-place cryptocurrency by market cap, but it has completely different
economics.
Cost averaging: One simple, but timeless, investing strategy
is to average into a market when making investments. The basic concept is to
make small purchases of the investment spread over a long time. The goal is to
spread the purchases over times when the market is up and times when the market
is down. This is an especially useful tactic when trying to create a position
in a volatile market like bitcoin or cryptocurrencies.