Is Bitcoin a long-term or short-term investment according to experts?
Cryptocurrency can be highly a volatile financial asset, recently experiencing major losses following the stock market down as investors seek safe harbors.
The US major indexes have entered bear market territory as inflation soars and the Federal Reserve aggressively raises interest rates to stomp it down. The drop in valuations has hit the cryptocurrency market especially hard as investors flee to the safety of less volatile assets.
After peaking at $2.9 trillion in November 2021, the global cryptocurrency market hemorrhaged $1 trillion in value in the last two months alone. As investors grapple with falling markets, what do the experts say about investing in cryptocurrency?
Long-term versus short-term Bitcoin investing
Standard basic advice is not attempt to predict the market. Professional investors often get it wrong and for those who have at most an elementary understanding of markets it’s extremely risky. Anyone planning on investing in Bitcoin or other digital coins should keep in mind their risk tolerance, financial health and whether their mental health can handle the whiplash of cryptocurrency swings.
“Investing in something new comes with its own set of obstacles, so be ready. If you want to participate, do your research beforehand and start with a small investment,” said Tanya Zhang, co-founder of Nimble Made, speaking to GOBankingRates. “Cryptocurrency is currently all the rage, but keep in mind that it is still in its infancy.”
If you are investing for your future, you want to take a long-term view. Although the value may drop, markets generally recover the value lost over time, this could happen with Bitcoin as well. Additionally, when considering the length of time you hold onto a financial asset you should remember that the IRS has different filing requirements for short-term and long-term investments, buying and selling cryptocurrency is no different.
Skeptics warn against putting money into cryptocurrencies
Many investors try to follow the market strategy of “buy low, sell high” but it can be difficult to predict the market. This is especially true for cryptocurrencies that can jump or drop at a moment’s notice on a tweet from Elon Musk or some other influencer that is hyping them.
Jake Hill, CEO of DebtHammer, self-described “outspoken critic of cryptocurrency” told GOBankingRates that investments like digital coins which “can be influenced by a single tweet from a billionaire is not a wise investment decision.”
Professor Robert Johnson of Heider College of Business at Creighton University cautions that crypto investors should be ready to lose their shirts. “Don’t even think about it. The major disadvantage in speculating in Bitcoin or any other cryptocurrency is that Bitcoin has no intrinsic (real) value. One cannot invest in BTC, one can only speculate in BTC,” he said. “My advice would be just don’t do it unless you are willing to lose your entire commitment.”
Cryptocurrency is not a conventional investment
During the covid-19 pandemic, the cryptocurrency market began to explode as people socially distancing at home started dabbling in online trading. Values soared to dizzying heights only to drop just as precipitously this spring. Bitcoin peaked at $69,000 in November 2021 but is now hovering around less than a third of that value.
TerraUSD, a stablecoin, was supposed to have its value pegged to the US dollar through a complicated algorithm. However, when it became unhinged in June, it imploded in spectacular fashion and is now basically worthless.
The US government is currently looking into how to regulate digital assets to protect investors and make the most of the developing industry which includes NFTs, non-fungible tokens, as well as the “decentralized” digital coins. In June, bipartisan legislation was introduced by Senators Cynthia Lummis and Kirsten Gillibrand.
The bill, which is a long way from becoming law, would treat most cryptocurrencies as a commodity like gold and not like stocks or bonds. It would also impose stricter regulations on stablecoins, disallowing algorithmic-based ones like the ill-fated TerraUSD coin.
Bitcoin wants to be an asset like gold
Bitcoin has been around for 13 years. It is the oldest digital coin of the over 18,000 that exist and has the highest market capitalization. The original cryptocurrency represents over 40 percent of the cryptocurrency market valuation.
Currently there are over 19 million Bitcoin that have been mined with the maximum limit set at 21 million tokens. The idea is that this restricted supply will mean Bitcoin will be like other commodities such as gold and maintain its value while decoupling from the rise and fall of stock markets.
However, the system has come under criticism for its environmental impact, the computers needed to mine new tokens and maintain the blockchain consumer vast quantities of energy. The way that the Bitcoin algorithm works also means that confirming transactions can take much longer than those performed through more established routes.