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February 28, 2018

Should You Really Stay Away from Bitcoin?

By James Broth

There are mainstream financial investments, and there are outliers. Precisely where Bitcoin and cryptocurrency fits on the spectrum is up for debate. Traditionalists are vehemently opposed to cryptocurrency investments, for fear that this red-hot market is nothing more than a bubble waiting to burst. Over time, we have seen evidence of this bubble phenomenon with the price of Bitcoin rising towards $20,000 in mid-December 2017 and deflating precipitously since then. Is this proof enough that Bitcoin and the 1,500+ altcoin that currently peppers the trading arena are nothing more than fly-by-night schemes by ICO companies?

High Interest in Digital Currency Spurs Demand

The jury is out on whether there is merit in the actual cryptocurrency, as opposed to the blockchain technology that underpins it. There is no doubt in the minds of technology gurus, banks and investment corporations, private and institutional investors that blockchain technology is the way of the future. However, is there a need for Bitcoin? The value of any asset is whatever people are willing to pay for it. If there is no demand, the price will drop since price activity is determined by consumer interest. Clearly, the burgeoning interest in digital currency has fuelled a juggernaut of epic proportions.

At its zenith in December 2017, cryptocurrency markets had a market capitalization approaching $1 trillion. Had Bitcoin, Ethereum, Litecoin, Ripple, Bitcoin Cash, and Ethereum Classic continued their inexorable march toward stratospheric heights, we would have reached the $1 trillion benchmark. That was not to be. The long-awaited correction took place and Bitcoin plunged beneath $7,000 per unit. Such volatility is to be expected with an intangible asset that is not regulated by any government or authority and relies on a decentralized system comprising nodes. It’s space-age stuff and is over the top of most people’s heads.

A Word from the Wise: Cryptocurrency Is Here to Stay

According to Olsson Capital leading strategist Hamish Bellwether, it’s not about investing or not investing – it’s the right combination that individuals need to strike. ‘It would be foolhardy to dismiss the merit of blockchain technology, Bitcoin, Ethereum, Litecoin, Ripple and others outright. These digital currencies and the technology that makes them possible is space-age stuff. There is tremendous merit in tracking these volatile assets and profiting off their price movements. Few assets have shown such explosive growth and widespread potential as digital currency. The decentralized technology allows for near-zero transactions costs, instant transfers, and no need for banks or financial intermediaries. It’s a game changer. People realize this and that’s precisely why they are trading and investing heavily in this nascent market.’

This begs the question: How should traders dabble in the cryptocurrency markets? There are several options available, including derivatives trading instruments, buy-and-hold for the long haul, and the purchase/sale of actual digital currency. The recent volatility has scared away many traders and investors. The unprecedented bull run was punctuated by stops and starts, eventually resulting in a bear market that saw the price plunge from $20,000 to around $10,000. When assets can lose 50% of their value within days, there aren’t many investors who are willing to take a chance and stick around. The flipside of the coin is that these financial instruments are just as likely to rise as they are to fall. Barring dramatic government regulation, or regulatory constraints from institutions like the IMF, FCA, CySEC, CME, CBOE and others, it is relatively safe to assume that cryptocurrency is here to stay. There will be a tightening of the legal framework within which this new asset class can operate – it’s coming, it’s just a matter of when.

Courtesy of James Broth, James is a business writer, mentor, and personal finance advisor. He has been consulting for SMB owners and entrepreneurs for the past seven years.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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