5 reasons why I finally decided to buy Bitcoin and Ethereum
the S&P 500 the index hovers around a record level and the Dow Jones Industrial Average is up 12% over the year. Impressive returns, especially given the strong performance in 2020.
Unlike last year, this rally is led by dividend and value stocks which are benefiting from strong consumer demand and an economic recovery. Most of the tech companies that played in last year’s recovery are down 20% – and some are down more than 50% from their highs. Cathie Wood’s famous ETF Ark Innovation is also down 16% for the year. And Bitcoin (CRYPTO: BTC), another of 2020’s hot investments, is down about 26% last month.
After thinking about it for a long time, I decided to take advantage of the downturn and buy Bitcoin and another high-level cryptocurrency, Ethereum (CRYPTO: ETH), for the first time. Here are the five reasons why.
1. I wanted to know more
Guy Spier, one of my favorite value investors, has long said that one of the best ways to find out more about something is to have skin in the game. He often joked about owning something. ‘a share of hundreds or even thousands of companies. And while the value may be negligible, the psychological effects of changing perspective from observer to owner can be powerful.
I wanted to make the same mental change with Bitcoin and Ethereum. While I have no idea where the price of either token is going, I think it’s a conversation worth paying attention to.
2. It was an amount I could afford to lose
I have by no means bet the farm on Bitcoin and Ethereum. In fact, my investments could drop to zero tomorrow and I would consider them like school tuition from the hard knocks.
By keeping the starting position low, I can avoid worrying about the ups and downs, instead focusing on learning more about both strengths. Although Bitcoin has been around for over a decade, it has been reported that less than 15% of Americans own cryptocurrency. Crypto is a new asset class for many, including myself. Therefore, it seems reasonable to test the waters before diving head first.
3. Increased institutional adoption
Institutional adoption is one of the most encouraging factors for investing in cryptocurrency now rather than a year ago. Fintech platforms like Square and Pay Pal now hold Bitcoin on their balance sheets. JPMorgan Chase CEO Jamie Dimon went from labeling Bitcoin a fraud in 2017 to seeing his company offer an actively traded Bitcoin fund.
Many executives, including Dimon, are not interested in Bitcoin on a personal level. But professionally, it seems reasonable to conclude that the cryptocurrency will experience increases institutional adoption in the years to come rather than becoming a fad in decline.
It’s not just financial firms that are increasing their exposure to crypto. Other industries are also following suit. Recent examples include Amazon Advertise web services that Chia, a arguably safer alternative to Bitcoin for the environment, can now be exploited on its platform. Stalwarts like Home Depot and Starbucks indirectly accept Bitcoin through personalized payment systems and digital wallet intermediaries. It’s too early to tell if the adoption we’ve seen is a sign of a tipping point, but it’s definitely a step in the right direction.
4. The environmental consequences should diminish over time.
One of the catalysts for the sale of Bitcoin has been environmental concerns. These concerns have already been discussed but have resurfaced recently due to comments from You’re here CEO Elon Musk. In a May 12 tweet, Musk said Tesla would suspend taking Bitcoin as a payment method, but maintained his bullish take on the future of crypto. “We are concerned about [the] the increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, ”Musk tweeted.
Bitcoin’s intense power consumption is comparable to the price. Its price increase is correlated with the increase in computing power required to exploit an additional offer. Falling renewable energy development costs lead to increased capacity, which should help renewables take a leading role in the global energy mix over time.
Besides the long term trend, there is reason to believe that renewable solutions for crypto mining will also gain traction in the short to medium term. In fact, crypto mining could actually accelerate the transition to renewable energies. If utilities can make money from excess solar and wind power by mining Bitcoin, then there is an incentive to develop projects even if battery storage technology remains limited.
5. The price seems relatively reasonable
While it is impossible to know the true value of Bitcoin and Ethereum, the fall in prices makes buying tokens cheaper now than a month ago. Bitcoin hit an all-time high of $ 64,863 per token on April 13. Ethereum’s all-time high hit on May 11 at $ 4,362 per token. The combined market value of the two tokens at all-time prices would be over $ 1.7 trillion. If this was a US-based company, it would be the third most valuable behind Apple and Microsoft. However, the sale pushed the combined value to just under $ 1 trillion.
Valuing cryptocurrency is an entirely different ball game than valuing a company’s stocks. There are no quarterly reports or tips, no conference call to help you monitor company updates or gauge management’s tone to know where the business is heading. There is one to credit if the price goes up, or to blame if the price goes down.
In fact, the valuation of cryptocurrency is also different from the valuation of a fiat currency or a commodity. The US dollar represents the US economy on the world stage. Its fluctuations are linked to American affairs and geopolitics. The same goes for petroleum, timber, copper and other commodities. A housing boom coupled with wood supply chain problems and a lack of capacity at sawmills is pushing wood prices to record highs. This dynamic provides a fairly straightforward explanation for the rise in timber prices. With cryptocurrency, it’s not that sharp.
A valuation of $ 1 trillion may sound insane; maybe it is. But for what could be a paradigm-shifting alternative to fiat money, it’s an assessment I’m able to understand.
The volatility of cryptocurrencies has become as standard as the setting sun. And it’s a trend that will likely continue for years to come. While volatility hampers Bitcoin’s aspirations to become a viable currency, Bitcoin has proven to be an interesting commodity. It will be a roller coaster ride, but the future of cryptocurrency looks bright enough to form a starting position in Bitcoin and Ethereum at these lower prices.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.