The consensus of many financial professionals is to heavily diversify one’s investments. With the advent of 21st century technology, which includes several online outlets to purchase stocks, bonds, ETFS, cryptocurrencies, calls, puts, and other financial investment instruments, investors indeed have a multitude of options (no pun intended) to put this untimely advice into action. Cryptocurrency arrived to the investment scene a little more than a decade ago, and became popular about 6 years ago. In 2020, several coins, such as Ethereum, Ripple, and Bitcoin Cash, have gained prominence. Bitcoin, with a market capitalization of almost $120 billion, is the most popular of all cryptocurrencies. Despite its position as the flagship cryptocurrency, most people associate Bitcoin with wild and extreme price shifts. What does Bitcoin fluctuation mean for cryptocurrency investors?
Note that when investing in any financial instrument—stock, bond, ETF, cryptocurrency—an investor is trading money for a partial share of ownership in that instrument.
It is important to note that when investing in any financial instrument—stock, bond, ETF, cryptocurrency—an investor is trading money for a partial share of ownership in that instrument. The value of that instrument will inevitably rise and fall over time because of complex supply and demand forces. Bitcoin is no exception to the roller-coaster ride of supply and demand. It experienced a major bubble in late 2017, which popped in early 2018. During this time, the price of one bitcoin soared to over $19,000, and bottomed out to under $4,000 at the end of the carnage.
The massive drop in price in early 2018, followed by sometimes daily fluctuations of over $1,000, buttress the idea that bitcoin is quite a risky investment. At the end of 2019, Bitcoin had a valuation of just over $7,000 per coin. Then, the tumult of 2020 hit. While the price of Bitcoin initially faltered with the onset of the coronavirus, it picked up steam as economic fallout effects became clearer. This fallout included a major drop in commercial real-estate value, as well as the Federal Reserve cutting interest rates to under 1%. As a result, many investors have parked large sums of cash into Bitcoin, which in turn boosted Bitcoin’s valuation to over $10,000 today.
Though many investors are bullish, Bitcoin remains volatile. Ultimately, the price of one Bitcoin fluctuated a total of 232% between March and August of 2020. As of early October 2020, Bitcoin is about 17% lower than its August peak. The good news: Bitcoin seems to have bottomed out. The bad news: that volatility still remains, with Bitcoin’s price rising and falling around 4%, week over week. Bitcoin bulls, however, point out that loose monetary policy, a turbulent election year, and a depreciating dollar all brighten Bitcoin’s future, at least for the next quarter. An interesting twist is the fact that Fidelity, an investment management company with over $8.3 trillion in assets under management, plans to create a Bitcoin Fund, available to institutional investors only. The creation of this fund may help lessen Bitcoin’s price volatility over time.
Currently, Bitcoin has an interesting future, though it’s important to stay informed about market forces, government monetary policy, and moves by the private sector (like the case of Fidelity). When investing in Bitcoin, one should track its price, daily. A Google search for “the price of Bitcoin” will aid in tracking Bitcoin fluctuations. Hopefully, Bitcoin continues to attract capital.