Is it too late to buy Bitcoin?

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After a few years out of the spotlight, Bitcoin is back. Last year, its price skyrocketed more than 600% to $53,114 before coming off the boil by about 20% in the first months of 2021. It's made many a millionaire, but don't let that fool you. The jury is still out on whether it will redefine finance or blow over like a house of cards.

Whereas the inflows in 2017 came mostly from speculators, this time it's largely driven by overseas institutional investors.

"[Institutions are] attracted by the good returns that the digital asset class is currently offering but, more importantly, by the huge future potential it offers," says Nigel Green , CEO of financial advisers deVere Group.

is it too late to invest in bitcoin

These institutional players include the business intelligence and software firm MicroStrategy, now the largest corporate holder of Bitcoin, payments company Square, asset managers such as Guggenheim, and US insurance giant MassMutual.

PayPal is now also supporting the cryptocurrency, while investment banks such as JP Morgan and BlackRock are releasing research papers after previously shunning the asset.

This newfound institutional acceptance is down to a few things.

First, institutions are starting to view it as a hedge against the inflation many fear is on the way, fuelled by a devalued US dollar following unprecedented levels of quantitative easing by the Federal Reserve.

"These emergency measures, like the massive money-printing agenda, reduce the value of traditional currencies like the dollar and raise the inflation threat," says Green. "Bitcoin, like gold, acts as a shield."

Apollo Capital chief investment officer Henrik Andersson agrees. "Investors are looking for a scarce asset and Bitcoin is in many people's eyes a better store of value than gold, and it can't be manipulated by politicians or central banks," he says.

Bitcoin's gold-like function as a safe-haven asset is also gaining traction among young people.

A deVere survey found that more than two-thirds of its millennial clients believe Bitcoin is a better safe haven than gold.

But it's not just younger investors who are interested.

Crypto platform BTC Markets has seen an influx of clients over 60 and self-managed super funds (SMSFs).

"We've seen a doubling in the over-60s who are coming on board," says CEO Caroline Bowler. "These aren't the typical young crypto investors. For a lot of them it's about the returns. They look at digital assets and they see there's a consistent return."

Cryptocurrency exchange Swyftx has seen SMSF and corporate trust accounts increase from around 1% at the start of 2020 to almost 10% of its customer base at the start of 2021.

SMSFs seem to be getting behind cryptocurrency in the absence of yield from traditional assets.

"Crypto investment provides people with choice, another investment option outside of your bank's 0.02% savings account return," says Swyftx CEO Alex Harper. "Yes, crypto is extremely volatile but investing in some of the high-cap cryptos over time has proven to be very lucrative for many people."

The hype is clearly there, but hype alone does not make an investment.

Cryptocurrencies like Bitcoin wear many hats, and the problem is not all of them can be worn at the same time.

Many people have bought Bitcoin in the hope of riding the growth train.

On the gains alone it's hard to argue that Bitcoin doesn't offer its holders growth, albeit volatile growth. But whether the word "growth" rightfully deserves to precede the word "investment" is another story.

In a Goldman Sachs presentation last year, Harvard economist Jason Furman and Goldman chief economist Jan Hatzius said that cryptocurrency should not be classified as an asset nor a suitable investment because it doesn't generate cash flow (like dividend-paying stocks), doesn't grow through direct exposure to economic growth, and doesn't provide diversification because it's largely uncorrelated to other assets.

"We believe that a security whose appreciation is primarily dependent on whether someone else is willing to pay a higher price for it is not a suitable investment for our clients," one of the slides in their presentation read.

Put even more bluntly by Berkshire Hathaway vice-chairman Charlie Munger, "Bitcoin reminds me of Oscar Wilde's definition of fox hunting: 'The pursuit of the uneatable by the unspeakable.' "

Then there's its namesake function: currency.

The problem is that currencies need to have a stable value - appreciating a little, but not too much.

"The argument that it's a medium of exchange is incorrect, it's simply too volatile," says Emanuel Datt, principal of fund manager Datt Capital.

Sellers can't be expected to change their prices on a daily basis. As Ray Dalio, the founder of Bridgewater Associates, says, Bitcoin isn't "very good as a store-hold of wealth because it's volatility is great and has little correlation with the prices of what I need to buy ... owning Bitcoin does nothing to protect buying power."

Rapid growth also creates an incentive to do what investors typically do with growth assets - hold onto them.

"If you have something that has the potential to rapidly appreciate in value, that creates hoarding," adds Datt.

If you think Bitcoin will greatly appreciate in value over a few months, why would you want to use it to transact? No one holds onto currency expecting it to be a growth asset.

Currencies also have to expand their scale as their usage increases.

"By any definition, if you're using something as a currency, it has to be expansionary. If you have $100 spread between one hundred people, then the population grows but the currency doesn't expand in proportion, the value of the currency goes up," says Datt.

Bitcoins can be split, but that doesn't itself change the value of their aggregate supply, unlike traditional fiat currency, which can be printed by central banks.

Other cryptocurrencies can be introduced into the mix should Bitcoin's limited supply undermine its use as a currency, but what then happens to the value of any one cryptocurrency, and how do sellers decide which cryptocurrency to use?

Stable influence

This problem has been partly addressed through the introduction of so-called "stablecoins" such as Tether, which have their values tied to fiat currencies or other assets. But while that may help stabilise the price of the coins, by extension it's controlled by central bank policy - the very things cryptocurrencies try to circumvent.

It also raises the question of control -those who dictate what a stablecoin is tethered to have ultimate control of its price.

As Tether states on its website: "Every Tether token is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties."

This problem has caught the eye of regulators.

Speaking at the 2019 South by Southwest Conference in the US, Securities and Exchange Commission director Valerie Szczepanik said: "I've seen stablecoins that purport to control price through some kind of pricing mechanism, whether it's tied to the issuance, creation or redemption of another type of digital asset tied to it, or whether it is controlled through supply and demand in some way to keep the price within a certain band."

This, she said, could lead to a situation where one central party controls the price fluctuation over time, which may put it "into the land of securities".

Maybe the best-use case for cryptocurrency is in the remittance market.

Previously, remittance had to be made through traditional platforms like Western Union.

According to BTC Markets' Caroline Bowler, Ripple's XRP-powered cross-border payments service, On-Demand Liquidity, is transforming the way remittance is transferred by speeding it up and cutting out fees.

"We facilitate cross-border payments that take milliseconds to cross borders," says Bowler.

"Rather than having to wait days and pay extortionate fees, it costs pennies to send remittance and it takes place instantly."

Gaining exposure

So, you've decided you need some Bitcoin or other cryptocurrency.

Exposure can be gained directly by purchasing cryptocurrency via an exchange such as BTC Markets, CoinSpot and Swyftx.

Be aware, however, that Australian banks have been known to freeze transactions to Bitcoin exchanges.

While your cryptocurrency can then be held on an exchange, it's better to hold it in your own wallet.

"It's commonsense and common practice for people to put their digital assets in their own personal wallets," says Bowler.

Wallets, such as the OKEx Wallet recommended by Bitcoin, store the public and private keys used to verify and trade your cryptocurrency.  OKEx Wallet is stored on your mobile device or desktop.

However, if you hold large amounts of cryptocurrency, physical hardware wallets are the way to go. Essentially like a USB stick for storing cryptocurrency, physical hardware wallets protect your cryptocurrency from malware, virus and phishing.

Remembering your private key is, no pun intended, key.

Stefan Thomas, a San Francisco-based computer programmer, has forgotten his private key to a Bitcoin stash valued at more than $300 million. At the time of writing, he had two guesses left before his fortune is locked forever.

Soon you may even be able to gain exposure to cryptocurrency via exchange traded funds (ETFs).

"ETFs have proven an incredibly popular investment vehicle, and their ability to minimise volatility by spreading risk across a given industry or asset class on paper would make it appealing in the hyper-volatile world of cryptocurrencies," says Jesse Powell , CEO of global cryptocurrency exchange Kraken.

"We will get there in the end, but it will be the growing understanding of cryptocurrency amongst progressive institutional investors that will make it happen."

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David Thornton was a journalist at Money from September 2019 to November 2021. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.