Bitcoin – Risk and Chance within Uncertain Times

Some people praise it, others shake their heads when they hear its name: Bitcoin is dividing the opinions of financial experts already for years. Recently the cryptocurrency came to the center of attention again due to a fulminant rise within a year of lockdowns and uncertain prospects.

What if you hear a story about becoming a multimillionaire in just 10 years without doing anything except making an investment of, let’s say, 10 Dollars? Sounds like a beautiful dream or one of those annoying scam mails, doesn’t it? Well, admittedly something like this is more than unlikely to happen, but still it’s not impossible either. In fact, it would have been possible if you were one of the early believers in something that you will currently find in almost every debate about finances and money – the cryptocurrency Bitcoin.

You probably came across Bitcoin somehow, at least since the end of the year 2020 you should have heard about it. Almost daily the news could present a new all-time high of the Bitcoin price until it reached $41,973 on the 8th of January 2021, before it slightly fell again.

But first things first: what is Bitcoin? No worries, we won’t go into the deep technical details. Bitcoin is a currency, like US Dollar, Euro or Macedonian Denar, but in contrast to those it doesn’t belong to a state or union, neither is it “managed” by a central bank or similar institution. It is a decentralized and digital currency, so physical forms of notes and coins are not common. Furthermore, while online transactions with traditional currencies need an intermediating organization like a bank, Bitcoin works peer-to-peer without a third party involved. For those reasons as well as other encoded privacy features, Bitcoin is considered as a comparatively anonymous payment means, what in turn was one of the main reasons why many people used it during its early days. It is no secret that Bitcoin was the means of choice for dealing with illegal goods and services on darknet marketplaces, but the times when the cryptocurrency was mainly serving such purposes belong to the past. Since its creation, Bitcoin went through many ups and downs, but the trend is clearly pointing up.

But why has the price of Bitcoin risen that much especially last year? One reasonable explanation can be this uncertain time that we live in for more than a year already. With COVID-19 the world became more and more unpredictable. We feel like things can change daily. To prevent a probably even worse collapse of their economies, many governments and central banks flooded the market with money. For that reason, some people expect an increasing inflation and fear that the money they have in their bank accounts (or under their pillows) right now could be worth much less in the near future. So they are searching for ways to store their value. While Bitcoin for sure is still a quite volatile and risky investment it has one big advantage compared to traditional currencies, namely, its amount is limited to a maximum of 21 million coins. For this reason, Bitcoin might be more comparable to gold than to other currencies, with some people even seeing it as “the digital gold”.

But people are searching for opportunities as well. With the start of the pandemic, many factors came together that ended up in a highly increased amount of people trading stocks and other financial products, some of them for the first time. During the lockdown, many people must have stayed at home and suddenly had a lot of free time. In combination with the stock market crash in March, they saw a chance to participate in the recovery process and the fast-rising stock prices. It is more than likely that during this time of raised awareness, many people came across Bitcoin, seeing it as a potential “money maker” too.

But probably the biggest reason for Bitcoins’ recent breakthrough is the fact that the currency is becoming more and more accepted and is slowly entering the barrier to mainstream. Institutional investors and “big players” like life insurance company MassMutual, hedge fund manager Paul Tudor Jones and many others undertook heavy investments into the cryptocurrency. Lately, also electric car company Tesla purchased Bitcoins worth 1.5 billion Dollars. That of course creates more trust and gives many once doubtful people or investors the courage to follow the trend as well. Furthermore, an increasing amount of companies enable their users or customers to pay in Bitcoin for their goods and services and to use it on their platforms. Well-known brands like Domino’s Pizza, Expedia.com and recently also PayPal allow dealing with Bitcoins within their services. Tesla plans to accept Bitcoin as payment for their products as well. Even former “anti-cryptocurrency” company Visa has warmed up with Bitcoin. The financial service corporation is launching a credit card with a Bitcoin reward system as well as it’s currently working on a way that makes Bitcoin more accessible and easier to buy.

But why am I talking about all of this? Do I want to say “put all your money into Bitcoin now?” – Definitely not! Bitcoin had a similar run in 2007, when its price rose from under $1,000 at the beginning of the year to almost $20,000 in December, before it dropped dramatically and eventually found itself at a price of $3,500 in December 2018. There are many indications that this time it’s gonna be different, that Bitcoin became mature. Some see Bitcoin increasing tenfold within a few years. Others think it’s just another speculative bubble as it was in 2017. Since January 8th, 2021, Bitcoin temporarily lost 25% of its value and fell back to $30,000 just to rise to over $58,000 within a few weeks later. Who knows, maybe the price falls back to $5,000 in just a few weeks, but maybe the price is not going under $50,000 ever again.

The truth is we can’t know for sure what is going to happen next. But isn’t this the case with many things? In most western societies we were used to live in a more or less stable and predictive world, at least we thought so. But things have changed drastically last year. With the Corona pandemic and the measures by the governments many people lost their jobs, had to shutdown their companies or faced other difficult situations – many of us had and still have to experience how fragile the world actually is. However, every crisis brings new opportunities. We just have to open our eyes and search for them. And we have to be willing to take some risks. The paradox is that at the moment people are seeking safety more than ever and for many of them taking risks (and therefore making their life even more unpredictable) might be the last thing they could imagine doing. But maybe we have to admit that after all safety is an illusion. Therefore, instead of playing save, better play smart. Because there might be a point when playing save actually becomes more costly than taking risks, the point when the act of doing nothing and just waiting for the life we were used to coming back could possibly be a wait forever.

Christopher Machold

Sources:
https://en.wikipedia.org/wiki/Bitcoin
https://en.wikipedia.org/wiki/History_of_bitcoin
https://www.cnbc.com/2021/01/08/bitcoin-btc-price-hits-41k-up-40percent-so-far-in-2021.html
https://theconversation.com/bitcoin-why-the-price-has-exploded-and-where-it-goes-from-here-152765
https://icoholder.com/blog/places-accept-bitcoin/
https://www.cnbc.com/2020/05/12/young-investors-pile-into-stocks-seeing-generational-buying-moment-instead-of-risk.html
https://www.cnbc.com/select/visa-backs-first-credit-card-to-offer-bitcoin-rewards/
https://www.forbes.com/sites/billybambrough/2021/02/03/visa-reveals-bitcoin-and-crypto-banking-roadmap-amid-race-to-reach-network-of-70-million/?sh=69d97244401c
https://www.cnbc.com/2021/02/08/tesla-buys-1point5-billion-in-bitcoin.html

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