Bitcoin and other cryptocurrencies have been getting a lot of attention lately. One Bitcoin ranged in price from $1,000 in early 2017 to a high of over $60,000 in March 2021, with intense volatility in between. Understandably, investors have questions – the Schwab Center for Financial Research tries to answer some of the most common.
Investors should treat Bitcoin as a speculative asset class primarily for trading
What is a cryptocurrency, and how is it valued?
“Fiat currencies like US dollars and euros are forms of money issued by governments to serve as legal tender. Cryptocurrencies such as Bitcoin, on the other hand, are ‘non-fiat,’ non-governmental forms of ‘digital cash’ to be used for electronic payments. Proponents believe the value of a cryptocurrency is based on the quality of the cryptology, the number of cryptocurrency units created, and the technology that limits the creation of additional units. Like any traded item, the value depends on supply and demand; the less units available, the higher the price buyers are willing to pay.”
Will Bitcoin or other cryptocurrencies become the new global currency?
“We don’t think so, but time will tell. As long as Bitcoin is subject to high volatility and hefty transaction fees, it likely will have only limited use as a medium of exchange, a unit of account or a store of value. Another barrier to broader public acceptance as a true currency is that, as cryptocurrencies become more widespread, the risk of regulation will probably rise – eliminating part of their appeal.”
Should I invest in cryptocurrencies?
“Bitcoin and other cryptocurrencies are speculative investments. Bitcoin doesn’t fit within traditional asset allocation models, as it is neither a traditional commodity, such as gold, nor a traditional currency. Bitcoin’s dramatic volatility is driven primarily by supply and demand, not inherent value. Bitcoin doesn’t have earnings or revenues. It doesn’t have a price-to-earnings ratio, price-to-sales ratio, or book value. Traditional value metrics don’t apply, so there are no methods for assessing its value that we endorse or find persuasive beyond the trading value.”
“Whether or not you should invest in cryptocurrencies depends on your goals and preferences as an investor. We suggest that clients approach it as a speculative investment and consider the high volatility and risks involved. For those who already have a diversified portfolio and a long-term investment plan, we see cryptocurrencies as being used primarily for trading purposes outside the traditional portfolio.”
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