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Investing in cryptocurrency has been hard this year. After seeing a huge peak in November, 2021, Bitcoin’s price has dropped dramatically. At the time of this writing, it is valued at about $19,000 vs. a high of over $67,000 almost a year ago. It has stayed fairly flat since June, never rising above $25,000.
So, has it finished dropping? Will it rebound? These are all good questions without clear answers.
What do we know about this industry?
As an investor, the first step is to understand what we’re investing in. Cryptocurrencies are decentralized peer-to-peer systems that are designed to remove the need for banks and central authorities to conduct transactions. This is similar to what was described by Satoshi Nakamoto when he published his whitepaper for Bitcoin in 2008.
In its original form, Bitcoin was intended to be a replacement for the dollar. Its use cases were to be similar to gold: as a store of value or hedge against fiat currencies. However, it failed as a currency because there wasn’t any value tied to it. No one was using it to buy anything, so the price was only supported by speculation.
In 2010, Satoshi Nakamoto introduced the concept of Bitcoin mining, which solved this problem. Instead of using the currency itself, miners could exchange their computational power for Bitcoins. This ensured that the price was tied to something useful: computational power.
The most valuable cryptocurrencies are those with the most users. The two largest cryptocurrencies in the world by market capitalization are Bitcoin (BTC) and Ethereum (ETH).
That’s some nice history and background, but it doesn’t tell you what will happen with the price of Bitcoin. But that’s because none of us really know.
What do I think about investing in Bitcoin this year?
Me? I’m bullish on its potential and think the price will increase over time, just as it has before.
Why? Well, that’s hard to say. I believe the world is heading for a major transition, and that we’re going to need more secure, decentralized, peer-to-peer money systems.
I think that people will see that this is better than our current system and start using it more. The world economy is incredibly complex and needs a new way of working together. As governments grow larger, they have more incentive to keep their citizens in line through control rather than freedom. We saw a small glimpse of this in the wake of the 2008 financial crisis when the federal government bailed out many of our largest financial institutions.
As a result, we need to find new ways to solve these problems. Cryptocurrency is one such solution.
Governments and Regulation
When governments can’t keep up, they will look for alternative methods to maintain control. And the best way to do this is by controlling the money supply and removing any competing currencies.
We’re already seeing this happen in Venezuela. As Venezuela’s economy collapses, people are trying to take their money out of the country. If they can’t convert it into U.S. dollars or other fiat currencies, they have no choice but to use cryptocurrency instead. This will not stop them from buying things. What it does do is reduce their ability to control how that money moves around. This will create more competition among currencies and allow other governments to provide more options for their citizens.
As more countries, governments, and financial institutions turn to cryptocurrencies in general, and Bitcoin and Ethereum specifically, I believe the prices will rise. Probably well beyond the highs they saw in November 2021. You just need patience. A lot of patience.