The Questions for my accountant section is signed by accounting science students from the University of Quebec in Outaouais (UQO).
Volatile since its inception, very volatile in recent weeks, Bitcoin (BTC) has been attracting more and more attention from investors in recent years. An important question arises: is BTC a good investment strategy for you?
One of the basic principles in finance is that the riskier the investment, the higher the investor expects a return. The objective is to obtain a higher return for a risky investment compared to a low risk investment.
History of bitcoin
This cryptocurrency appeared during the 2008 financial crisis which affected the majority of industrial countries, including the United States and Canada. Following the loss of confidence of governments, Satoshi Nakamoto (person or group of people still unknown) founded the virtual currency Bitcoin with the aim of creating a decentralized currency, that is to say not controlled by the state .
BTC is traded on a new technology called blockchain which allows BTC holders to trade freely without intermediaries.
Investment strategy and BTC
A well-informed investor knows that to obtain long-term returns while minimizing financial risk, he must diversify his investment portfolio. In addition to being diversified, a portfolio will have specific characteristics unique to each investor such as risk tolerance and investment objectives.
Being extremely volatile these days, BTC therefore has a fairly high level of risk. Thus, an investor can choose to diversify his investments with this cryptocurrency if his risk tolerance is high and he does not need these liquidities invested in the short or medium term.
Yield of BTC
In its early days, Bitcoin traded at US$0. A month after its creation, the value of the coin increased to US$0.08. In March 2021, Bitcoin soared to US$60,000 which made the currency the best performing asset of the past decade with an annual return of 230%.
In comparison, the NASDAQ 100 (QQQ index) and gold (GLD index) achieved an annual return of 20% and 1.5% respectively. In March 2022, the value of Bitcoin stood at US$40,951, a drop of around 32% in just one year. The cryptocurrency is, as of June 3, 10:00 a.m., valued at US$29,710.38. With the passage of time, we can note the high volatility of BTC.
Some Important Risks
Money plays three important roles in our economy: it serves as a medium of exchange (carrying out transactions), a store of value, and a unit of account.
Currently, Bitcoin serves primarily as a store of value. The market value of Bitcoin is partly explained by the confidence of investors in this cryptocurrency. However, if investors lost their faith in Bitcoin, its market value would drop sharply. Over time, it is possible that BTC will increasingly serve as a medium of exchange. To date, there are few places where Bitcoin is accepted as a medium of exchange in our daily lives.
Another risk associated with Bitcoin is its correlation with the stock market. Over the past year, this correlation has increased, which goes against the principle of portfolio diversification.
A third important risk relates to blockchain technology. In order to transact on the blockchain on his personal account, the investor must use what is called a private key and a public key. The account holder must not lose the identity of his private key, otherwise he loses access to his account and therefore to all of these Bitcoins. This is a situation that has happened more than once since the creation of Bitcoin.
The advantage of bitcoin
Bitcoin is one of the most credible cryptocurrencies on the financial market today. It is this credibility that makes virtual currency one of the most traded cryptos today.
Despite its volatility, BTC remains increasingly a sought-after investment. What is important to remember is that the market value of BTC seems to be largely based on the confidence of BTC holders and prospective investors.
If that trust disappeared, BTC would no longer have any value. You should perhaps keep in mind the following principle: invest only what you would be ready to lose. This will keep you calm in times of market panic.
Jérémie Chamberland with a DESS in professional accounting at UQO