December 23, 2015
It has been a long time since my last financial prediction. It used to be something that came easily to me, but no more. You can read my last one here.
It seems time to offer my thoughts and this time my advice can be condensed to:
Buy Bitcoin for 2016.
I’ll admit my own self interest, I currently own 1.5 BTC and am buying more each week. It is only recently that firms like Coinbase have started to make Bitcoin easy for us Europeans to buy, so I am getting in now, several years later than I probably should have. My recommendation is simply that for a limited amount of money, investors ought to be getting in as well. (I write “limited amount of money” for a reason – bitcoin is very volatile and potentially high risk. You should invest only a small part of your wealth into an asset like this.)
Why is 2016 special?
There are a number of good reasons that make it very likely that Bitcoin’s future is very bright.
1. There will be a halving in summer 2016. The algorithm that powers bitcoin produces a number of coins (25) every 10 minutes or so for miners that have solved math problems. The math problems are the cryptography that enables the blockchain to verify all trades. Every 4 years the reward for miners will halve, meaning that less news coins are created. This obviously means that new supply will become more limited.
2. Bitcoin transaction numbers are at an all time high. More services enable payment by bitcoin, more people are investing and trading and more money is coming in. Numbers in recent months have shown that total transaction volume is higher week after week. As demand rises, and supply becomes more limited, it seems reasonable to expect price increases.
3. Many of the security issues have been solved. A couple of years ago, the largest exchange, Mt Gox, crashed amid allegations of theft and fraud. It does not seem to be clear, still, what actually happened, but lots of people lost lots of money.
There are now a number of BTC only sites where security is taken very seriously and us cryptographically incompetent mortals can buy and feel pretty secure without needing to learn everything. The best example that I know of the Coinbase Vault.
4. As mentioned above, the number of transactions is higher than ever. Bitcoins are really quite usable in the digital world. The likelyhood that bitcoin will survive and that mass adoption is coming are better than ever. The risks of BTC as a project failing are now very low.
5. If you are an investor, BTC offers potential portfolio diversification. It is actually quite hard to define a bitcoin (it is an asset, money, a currency and a commodity). This means that there is nothing else that a normal investor might invest in that reacts the same way to news or events. It has negative correlation with many other assets.
For example, many investors around the world are using it as a way to get money out of their home country. There has been massive buying in China for this reason, but when the Greek financial crisis was at it’s height earlier in the year, prices rallied.
You could describe it as being like gold because there is a finite amount of the stuff, but it is spendable in a way that gold is not. It is a currency, but is more portable and international than even the US dollar. It also has a pre-set maximum issuance which makes it unlike fiat currency that can be inflated away. Instead of inflation, bitcoin is much more likely to have price rises.
Whether you believe me or not – and you should always do your own due diligence – BTC is an asset that is very interesting and has great potential. At the time of writing, 1 BTC = 401.93 (Bid) and 402.87 (Ask) euros on Kraken so you can track progress along with me. I really would not be surprised if the price doubles through the course of 2016.
As mentioned above, the price is volatile and difficult to predict in the short-term, so this needs to be an investment that uses fun money that can be tied up for many months or a few years and is unlikely to be needed at short notice.
Finally, it goes without saying that this is for information and entertainment purposes only. Asset prices rise and fall and you should not hold responsible or sue an anonymous blogger if his tips do not work out.
Let’s all have a healthy and prosperous 2016.
January 2016 Edit: In early January this article explained why Bitcoin might be useful for portfolio diversification as described in part 5 above.financialguy