Imagine this: If you had spent about $400 to purchase 30 Bitcoins in 2012, today you would be a millionaire. Welcome to the thrilling, highly volatile, mostly unregulated, and yes, at-times addicting world of cryptocurrency, where your investments can triple in a matter of months or crash in a matter of days. Cryptocurrency is the Wild West of finance.
In January 2020, one Bitcoin was worth $9,500. Today, one Bitcoin is worth more than $35,000. You are likely asking yourself, “Why didn’t I buy Bitcoin years ago, when my crazy libertarian friends told me to invest?” Fear not. It’s still not too late to enter the game. As cryptocurrencies become more mainstream and easier-than-ever to buy, and inflation becomes a very real risk, assets like Bitcoin could continue to increase in value.
Until recently, cryptocurrencies were relatively esoteric. But as big names like Tesla CEO Elon Musk and hedge fund titans like Paul Tudor Jones jump on the crypto bandwagon, Bitcoin and similar currencies have burst into public consciousness. Still, many people don’t know how these offerings work on a practical level.
Cryptocurrencies are decentralized digital assets designed to work as alternative currencies or ways to store wealth. The “coins” exist in computerized databases that use strong cryptography to secure transactions, control the number of existing coins, and verify coin ownership.
Bitcoin, by far the most established offering in the crypto class, was invented in 2008 and released the following year. Bitcoin isn’t backed by anything physical, nor is it connected to an entity that creates a good or service like a typical stock. The only factor driving growth is demand, which has been rising steadily due to its finite quantity.
Other popular cryptocurrencies include Ethereum (the second-largest cryptocurrency by market capitalization), Litecoin, and Bitcoin Cash. Like Bitcoin, all have seen incredible growth over the last year. At the beginning of December 2020, one “Ether” was worth about $600; currently its value is more than $1,300.
Today, almost anyone can buy these currencies at quantities as small as $1 on platforms like Paypal, Square, and Robinhood. While the original concept was for these assets to act as an alternative currency, most investors use them to diversify their portfolios, store wealth, and serve as a cure for loose monetary policies adopted by central banks.
Over the last three months alone, the value of one Bitcoin nearly tripled. If coin holders believe the currency will continue increasing in value, they will be less likely to spend it on daily expenses, like groceries.
Despite a record rally, Bitcoin still may not have seen its top. Demand could soar even higher over the next year if Washington, D.C. gives people more incentive not to sit in U.S. dollars.
President Joe Biden hadn’t even been in office a week when he proposed a $1.9 trillion “economic rescue package” that would include sweeping blue state bailouts, generous unemployment benefits, and $1,400 checks for all Americans. The massive bill—subsidized by a combination of tax revenue, borrowing, and money printing—is a preview of what to expect now that the Democrats have control of the White House and both chambers of Congress.
The United States is currently almost $28 trillion in national debt, and blowing out federal spending to unseen levels could cause inflation over the next few years—or, worse, stagflation like in the bad old days of the 1970s under Jimmy Carter. Cryptocurrencies, like precious metals, can serve as a hedge against inflation.
Still, with the potential for big gains in cryptocurrency comes the potential for big losses. Seasoned Bitcoin investors will recall the infamous “crypto winter,” when the value of each coin plunged from $19,200 in December 2017 to $3,200 the following year—and then stayed low for several months, as novice investors panic-sold their coins. Imagine dumping five figures into Bitcoin, and then seeing 80 percent of your investment evaporate.
There is always risk, especially with such a new asset class, and regulatory threats to growth could be looming on the horizon. Government are generally not favorable towards cryptocurrencies because they take fiscal control out of bureaucratic hands and foster transactions that are in many cases untraceable.
Biden’s pick for Treasury secretary, Janet Yellen, is famously anti-crypto. Earlier in January, Yellen said without evidence that cryptocurrencies are “mainly” used for illegal activities and suggested that lawmakers “curtail” their use. Not surprisingly, the day after her comments, Bitcoin was down 7.6 percent and Ethereum was down 9.7 percent.
All it takes is one federal regulation aimed at punishing cryptocurrencies or squashing innovation to make the entire house of cards collapse. Even speculation or fears of such regulation becoming more likely could cause a significant crash. On the other hand, some investors have pointed out that smart, non-stifling innovation could give the asset class more credibility and cause it to soar in popularity.
Cryptocurrencies represent the possibility to get rich, or to get poor. Play at your own risk. But sitting in the U.S. dollar is arguably risky, as well. After all, nobody knows what Bitcoin or Ethereum will be worth in one year—yet it is almost certain that in one year the dollar will have less purchasing power than it does today.