During the Bitcoin Bull Market Peak of November 2013 — Coinbase, a trusted digital asset exchange company located in San Francisco, listed this selling price for 1 Bitcoin (XBT) at:
$1108.80.
People sang “to the moon!” But within 19 days the price dropped by 53.5%. People lost money. Media outlets brushed off the technology. Investors and financial analysts gave it the inaugural "thumbs down" that happens when a stock, commodity, or currency drops. Market optimism was crushed.
And by January 2015, the market hit its next all time low.
The State of Bitcoin Today
Two years later, the aftermath of this price meltdown has left a new wave of engaged Bitcoin users. More governments are accepting and regulating Bitcoin now and the IRS has a system in place to include Bitcoin on your Taxes.
Another good foot note of strength, transactions have increased by 257.9% since the Peak. Of course we cannot take this number to be only humans, but also bots and other programs.
Bitcoin has steadily rebuilt value. More people are ready for drops in the market because they understand the context around Bitcoin, which we will discuss in a moment.
Considering what we know now, is there a way to safely buy Bitcoin without dramatically losing the value of your money?
Backtesting 2013-2016 Price Fluctuations: The Outcome of Investing $100 Into Bitcoin Every Month
Could we safely put money into the blockchain without taking dramatic hits to the value of our money? Like the “set it and forget it” investors who, with conviction, auto invest every month, we are going to do the same, except with Bitcoin (XBT). (Hint: Bitcoin is much scarier!)
I ran a small backwards market test. In this test, we buy at the peak and on the 1st of every month afterwards. I kept track of these variables:
• Bitcoin bought per month
• Bitcoin total per month
• lost value
• positive value
• principal amount
• total value
But first, is Bitcoin worth investing in?
An Honest View: Bitcoin Investment Potential
Bitcoin is not an investment. The majority of investment experts would agree that Bitcoin is not an investment. It’s prices vary far too much. It’s an innovation and by no means carries any foreseeable guarantees. The rise of this technology is historical. In other words, there is no information or metrics we can use to predict any part of its future success.
It is risky. Based on the value of the technology, its adoption level, and the community of developers building technology on top of the basic infrastructure, we are speculating on Bitcoin's future success. If widespread adoption occurs for Bitcoin, then the market cap MUST increase because the current Bitcoin market cap of $9.8 billion is too small to support a global currency. For example, there are about $1.46 trillion U.S. Dollars in circulation.
We don’t know if it will be adopted widely. Bitcoin is network of transactors, miners, savers, and more who operate through the Blockchain network. Adoption for another coin isn’t as simple as making the coin popular. The infrastructure on top of the Blockchain network must accommodate the coin as well, and this takes developers and investors putting money into the industry to make this happen. This fuels an argument that Blockchain wouldn’t be anything without Bitcoin. Without Bitcoin, development on top of the Blockchain would severely slow down and investment money would dry up. Of course, this is speculation
Bitcoin’s network has more computing power that the world’s 500 top supercomputers. The value of bitcoin does not just come from the technology, but its “massive computing network whose sole purpose is to engender and guarantee trust in value transactions between two disparate and untrusting parties” according to Reggie Middleton, founder of Veritaseum, a peer to peer financial services platform built on top of the Blockchain network.
You get the basics. Now time to the good stuff.
We will be using Coinbase’s price chart because you can set a daily buy, weekly buy, or monthly buy using this platform.
The Results: An Ideal Outcome
At the end, by October 9, 2016, you would own 9.1683710456 Bitcoin.
Also, the average price per bitcoin you would have paid for is $613.
The total amount of money you put into Bitcoin is $3700.
The total worth of all your Bitcoin is $5666.05306
You made $1966.05306!
What does this mean?
Harsh Market Fluctuations Make this Implausible
If you look through the numbers, you can see how volatile the process is to make that return. At the end, you earn 36.47% increase in total value (crazy), but more than 90% of the time you are down by a dramatic percentage.
On February 1, 2015, you are down 46.5%!
• Principle (amount invested): $1400
• Total worth of Bitcoin: $744.81
If You Want to Keep Buying Bitcoin: Prepare Yourself for Risk
Bitcoin should not be, by any means, part of anyone’s portfolio in terms of security.
On the other hand, if you have a percentage of funds you allocate to huge risks with huge potential upside, you could consider Bitcoin for a small percentage of your risk funds.
Again, be prepared to lose your money. Do you think you have the emotional stability to stay strong during the tides of the Bitcoin market?
Imagine having $300,000 invested. A 46.5% drop means that value loses $139,500. Imagine that! What a day that would be.
But hey, if you got an extra $50 lying around every month, it might pay off to put some in Bitcoin every month.
Disclaimer: I am not a financial advisor. I write about finances and give my opinion, not professional advice. None of this information is market advice, but a thought exercise to consider Bitcoin as an alternative market for investing. Only invest if you have funds to do so.