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Bitcoin

Bitcoin 101: What Is It And Why Is It Gaining Popularity?

When most people think of retirement investments, they may think of stocks, ETFs, mutual funds, and bonds. These assets have been staples in portfolios as they have a rich history with relatively stable gains and global acceptance.

But the global impact of COVID-19 and its financial impact on society has caused investors to consider new forms of investments. Bitcoin and other cryptocurrencies have been gaining popularity recently with endorsements from wall street and big companies like PayPal, and investing in cryptocurrencies has become easier and more accessible to modern investors, including using their 401(k)s and IRAs.

 

What is Bitcoin?

Bitcoin is the first cryptocurrency created and it was developed in 2009 as a direct result of The Great Recession. It runs on blockchain technology, a public ledger that is publicly verifiable and is resilient to external disturbances like hackers.

For Bitcoin to be adopted as a successful currency it must meet qualifications related to scarcity, divisibility, utility, transportability, ease of counterfeiting, and more. This chart shows how Bitcoin compares to other generally accepted currencies and stores-of-value:

One of Bitcoin’s most unique traits is its scarcity. The maximum number of Bitcoin that will ever be produced is 21 million and there are currently around 18.5 million in existence today.  Once 21 million Bitcoin have been mined, the supply will be tapped out.

Much like gold and precious metals, Bitcoin’s scarcity is valuable for investors as this makes Bitcoin immune from inflation, which is a negative attribute of fiat currencies like the US dollar and the Chinese yuan which can increase their money supply for any reason, thus diluting the value of their currencies.

This attribute has become especially important for investors during the COVID-19 pandemic as the Central Banks around the globe are printing billions of dollars, which ultimately is expected to cause high inflation and decreasing value of the US Dollar.

 

Why should Bitcoin matter to Investors?

Bitcoin has been on a massive bull run since October 2020 now reaching record highs near $50,000 per Bitcoin (as of January 2021).[MB1]  This far eclipsed the previous highs near $20,000 reached in late 2017, where the price then later dropped by nearly 80% a year later. How is it different this time?

The bull run of 2017 was largely driven by retail investors, however, this bull run is quite different with growth driven mainly by institutional investors. Wall Street firms pumped $5.75 billion into digital asset funds in 2020, up 660% from 2019, according to the Dec. 21 crypto inflows report from CoinShares Research.

Corporations such as PayPal, Square, MicroStrategy, and even The People’s Bank of China are getting involved in the cryptocurrency revolution as they either enable, invest, or create cryptocurrencies. This could just be the beginning of a far greater cryptocurrency rally as crypto has been consistently earning more recognition and adoption from individual investors and corporations alike.

Bitcoin’s valuable scarcity, discussed above, enables Bitcoin to be considered “digital gold” and a likely hedge against inflation during the current pandemic. This scarcity also provides Bitcoin with an unusually high risk-return ratio that shows despite its “perceived risk” that its returns can greatly out-performed traditional assets in the future.  

In 2020, Bitcoin significantly outperformed the S&P 500 by a sizable magnitude with the S&P 500 increasing around 16% and Bitcoin finished the year up near 296%.

Bitcoin has been a highly speculative and volatile asset as investors debate the merits of its technology and value. However, as Bitcoin’s price continues to hit record highs and out-perform the rest of the market in 2021, investors need to take heed.

Want to invest in Bitcoin without paying taxes? Consider signing up for a SDIRA account with us to invest in Bitcoin and take part in the “digital gold” revolution.

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