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There are Pros and Cons to Buying Bitcoin

The price of bitcoin was already soaring when Tesla announced in February that it had bought $1.5 billion worth of the digital currency, sending its value climbing higher. The electric-vehicle maker said it would soon accept bitcoin as payment for its products, too. But in truth, Tesla was a tad late to the party, notes Nellie S. Huang, Kiplinger's Personal Finance.

Several well-known firms had already embraced bitcoin in one way or another. And Mastercard and PayPal have each said customers will soon be able to use bitcoin to pay for purchases through their respective networks. As of early April, demand has driven up the price of the cryptocurrency by nearly 700% over the past 12 months.

Does that mean it’s time for regular folks to buy bitcoin? Not necessarily. There are pros and cons to buying it, and its recent popularity doesn’t erase its drawbacks.

What is bitcoin? The 11-year-old cryptocurrency was the first of its kind. It gets its name from the technology behind it – every transaction is encrypted by computer code, known as blockchain technology, which eliminates the need for a middleman or a central bank.

What’s driving the price? There is a finite supply of bitcoin. Only 21 million tokens will ever be made, and nearly 19 million bitcoins are already in circulation, so there are fewer than 3 million left to be created. And the rules around how the tokens are created along with other restrictions mean a dwindling number of tokens will be issued in the coming years.

Such scarcity is driving demand, says Tom Jessop, head of digital assets at Fidelity Investments, which launched a passively managed bitcoin fund targeted at institutions.

Will other digital assets displace bitcoin? Scarcity and increased demand could help bitcoin stay dominant. Yassine Elmandjra, a cryptocurrency analyst at Ark Investments, says bitcoin will capture the lion’s share of the market for digital assets over time. “There may be room for two to five additional currencies that capture 25% to 35% of the total market share,” he says.

Is bitcoin a good investment? It has been over the past 12 months. But some investment professionals still view the virtual currency skeptically, including Matt Andrulot, of Verdence Capital Advisors, which caters to ultra-high-net-worth investors. “It’s volatile and speculative,” he says.

He’s right about the volatility. In just two weeks in January, bitcoin lost 25% of its value. During the pandemic sell-off in 2020, the price of bitcoin fell 49% from its peak to its trough (the S&P 500 index, by contrast, dropped 34%). Because bitcoin doesn’t generate any cash flow or earnings – and never will – its price is driven purely by demand, so it’s speculative. “Be prepared to lose the entirety of your principal,” says Thomas Stapp, a certified financial planner in Olympia, Washington.

That said, bitcoin could still have a small place in an investor’s portfolio. But given the sky-high volatility, it should take up no more than 1% to 3% of your assets, say many advisers. Limit your investment to an amount you can afford to lose, says Leo Marte, a CFP in Huntersville, North Carolina. “That kind of mind-set will bring you to the right allocation for you.”

On April 12, one Bitcoin was trading at US$60,700 or CDN$76,179.

Editor’s Note: Nellie S. Huang is senior associate editor at Kiplinger’s Personal Finance magazine,

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