Bitcoin hit the $11,000 mark for the first time in late November, passing the milestone on several exchanges and indexes. When you consider the digital currency’s rapid growth, you might think that people who say a single bitcoin could be worth $50,000 in the next decade might be onto something.
After all, when you look at bitcoin’s price history, especially in the last month, the cryptocurrency certainly appears to be on the brink of something big.
But what if we’re in a bitcoin bubble? Is now really the time to invest in bitcoin? And what of other, newer cryptocurrencies, like Litecoin?
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How much is a bitcoin worth?
Bitcoin’s gains this year have been impressive, with the dollar value of a bitcoin, as quoted by cryptocurrency exchange CoinDesk, up more than 1,000 percent since the end of 2016, outperforming all other major asset classes.
But even though bitcoin now sits at an all-time high, the gains come in the wake of a sharp slump in the digital currency in recent years. Bitcoin’s price history from 2012 to the beginning of 2017 shows a fitful rise from less than $10 to $1,000:
But since striking $1,000, the conversion rate from bitcoins to USD has jumped elevenfold. In other words, the cryptocurrency has gotten expensive — and fast.
It has seen an exceptionally dramatic increase in price since the beginning of October, as shown in this Nov. 29 bitcoin price chart:
Robert Farrington is a bitcoin investor and enthusiast in blockchain — the digital ledger technology that is used to create and trade the currency. He has been slowly selling some of his bitcoin holdings since the beginning of the year and believes that the current price of bitcoin is unsustainable — at least in the short term.
“Bitcoin is still absolutely a speculative investment and it’s absolutely in a bubble,” he said.
Farrington points to the fact that there isn’t much to back bitcoin, other than its current price.
“There is no investment value other than price, so you’re always just gambling on what others will pay,” he said. “There’s no intrinsic worth to it, and no underlying asset, as with stocks, that produces income.”
As a result, it’s hard to determine what a bitcoin is really worth. However, it’s possible for some investors, like Farrington, to make money by investing in bitcoins, due to the changes in price. He does warn, though, that we might be close to a top in the market price, and buying bitcoins right now could be risky.
“There’s tons of speculation right now, and I think we’ll see a correction soon,” Farrington said.
Farrington’s not alone in his skepticism. Yale economics professor and Nobel laureate Robert Shiller, for example, said in September that the intrigue of bitcoin has helped propel it beyond a reasonable price.
“The best example [of an investment bubble] right now is bitcoin. And I think that has to do with the motivating quality of the bitcoin story,” Shiller told Quartz in an interview. “I’ve seen it in my students at Yale. You start talking about bitcoin and they’re excited!”
What’s next for bitcoin?
Still, the possibility of a bubble isn’t the same thing as the end of bitcoin. Farrington, for one, thinks bitcoin is here for the long haul.
“I view it as the Amazon phenomenon,” he said. “Amazon exploded before the internet bubble, collapsed, then started to rise again after it got its footing. And here we are today,” he said.
“The current bubble will burst,” Farrington continued, “then bitcoin and blockchain technology will gain its footing and we’ll see some long-term sustainable growth in the future.”
The fact that some of the big exchanges have begun to take interest have done a lot to bolster the case for bitcoin as a permanent fixture in finance. In October, the Chicago Mercantile Exchange (CME Group) announced that it plans to start offering bitcoin futures. Additionally, a company in France recently launched a mutual fund tracking bitcoin.
Nor is bitcoin the only function of blockchain technology. Other uses for blockchain technology platforms include facilitating real estate transactions, smart contracts, and even supply chain management.
Blockchain technology could also allow for more secure exchanges of information at a faster pace, making it attractive for many different business applications.
And blockchain technology can be used to speed up financial transactions that don’t necessarily include cryptocurrencies. In Japan, a group of banks plans to use Google blockchain platform Ripple to manage payments.
Investing in other cryptocurrencies
It’s not just about buying bitcoins, either. Other cryptocurrencies, like Litecoin, have seen increases in prices as well. They are much less expensive than bitcoin.
While the bitcoin’s price history has been off the charts, rival cryptocurrencies have seen more modest growth. For example, as this chart from Coinbase shows, Litecoin has gained more than 65 percent in the last month:
Yet another cryptocurrency, Ethereum, has also increased in value in the past month, gaining more than 50 percent. For those concerned about bitcoin’s high cost, alternatives can be attractive.
However, Farrington said that if the bitcoin bubble bursts, it’s likely to take other cryptocurrencies down with it. Even if there is an eventual recovery from what he expects to be a correction in blockchain as a whole, Farrington warns that cryptocurrencies will likely always have a speculative element to them.
“They’re currencies,” he said. “That means you’re making a trade, or betting on whether or not the price will rise or fall.”
Additionally, Farrington points to other risks in cryptocurrencies:
“While bitcoin and other cryptos are touted as free from the government, there are small groups of players in the space that wield a lot of power and control. Cryptocurrency wallet operators and miners make decisions that might not always align with the holders of bitcoin as a currency.”
The wild volatility in bitcoin also limits its appeal to speculators, at least for now. Last month, just ahead of the digital currency’s big November rally, Ford Financial Solutions founder Julie Ford said in a Wall Street Journal interview that bitcoin was just too big a chance for many investors to take.
“While the potential upside is alluring, the significant risk of loss is incompatible with prudent investing for long-term goals like college savings, buying a home or retirement,” she told the Journal.
Still, if you keep your bets small and your potential losses manageable, bitcoin might be worth a shot. Farrington believes investors who keep their holdings small can benefit from price spikes in bitcoin and other cryptocurrencies.
“When companies adopt blockchain technology or bitcoin becomes more widely accepted, we’ll see investment opportunities,” he said.
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