Why People Invest in Bitcoin
Table of Contents
- Investors look to bitcoin as a store of long-term value and as a means of protecting generational wealth.
- Investors seek to utilize bitcoin to make purchases, efficiently transact with others, and provide an alternative collateral to traditional assets.
- Investors recognize the pain points of centralized financial institutions and want greater autonomy over their funds.
The demographic of investors in the bitcoin market has changed dramatically since Satasho Nakamoto created the Bitcoin network in 2008. As the bitcoin market has matured, individual investors, family offices, and institutional investors have increasingly looked to bitcoin as an investment opportunity. The price action of the market has increased investors demand for bitcoin, and the desire to diversify, future use-value, global macroeconomic events, and regulation have strengthened investors' confidence in the long-term value of bitcoin.
Investors Seek Increased Portfolio Diversification
When the bitcoin market was in its infancy, relatively little data existed for investors to understand how bitcoin would perform against other asset classes and as part of a portfolio. As the bitcoin market has matured, it has proven to have a low correlation with traditional investment assets, and a growing number of individual and institutional investors are including bitcoin in their portfolio to increase diversification. Increasing diversification is important for maximizing the expected return of the portfolio while mitigating risk, a fundamental investment concept known as portfolio theory.
Investors Need a Long-Term Store of Value
One of the strongest value propositions of Bitcoin is its ability to maintain its value long-term. Investors' confidence in the long-term value of Bitcoin has grown as the bitcoin price has increased year-over-year, while other assets and cryptocurrencies have been unable to produce similar results. An increasing number of individual investors see the benefits the long-term value of bitcoin can have on their retirement portfolio and on their generational wealth. Many major financial institutions now offer exposure to bitcoin in IRAs. Additionally, the ability to self-custody bitcoin makes the transfer of wealth between generations more efficient than traditional banking methods involving third-parties, and individual investors are holding their generational wealth in bitcoin because it maintains its value better over time than fiat currency.
Investors view bitcoin as a long-term store of value investment in part because it has the ability to be a hedge against inflation. Bitcoin’s finite supply of 21 million protects it against the inflationary pressures a potentially infinite money supply places on fiat currencies. As the money supply expands and real yields fall, bitcoin has become increasingly attractive to individual and instititonal investors who want to protect the long-term value of their investments.
Investors Want to Capitalize on Future Use-Value
In addition to being a long-term investment, bitcoin offers unique use-value opportunities for investors. The use-value of bitcoin will increase as the market matures and institutional adoption grows, and investors are already gaining exposure to bitcoin as a method of payment, efficient transactions, and debt collateral.
A growing number of merchants offer bitcoin as a payment option. As the dollar depreciates relative to bitcoin, its divisibility and long-term value will make it a more attractive payment option to buyers and sellers. Bitcoin’s divisibility means it’s suited for any sized payment, and payments can be made almost instantly from one party to another, while maintaining transaction security and transparency. Because trusted third parties aren’t needed to verify transactions, transactions can occur much faster than traditional monetary payment systems, without concern for double-spending.
Relatively new in the market, several lending institutions offer clients the opportunity to use bitcoin as collateral for a loan. Traditional collateral assets like real estate, vehicles, or business assets are depretionary, so bitcoin’s ability to maintain its value long-term can appeal to consumers. Using bitcoin as collateral can also guarantee a faster loan process; the customer either holds the bitcoin or does not, and this can be verified faster than the traditional loan collateral process. For investors who plan to hold bitcoin long-term, using it as collateral allows investors to utilize the value of their bitcoin without having to sell it.
Investors are Skeptical About Centralized Financial Systems
Bitcoin, as well as the creation and use of its blockchain, disrupted traditional centralized financial systems, and many investors have chosen to invest in bitcoin and utilize the Bitcoin network as an alternative to the negative qualities of traditional centralized financial institutions. On a macroeconomic scale, many investors are increasingly worried about the potentially infinite money supply of traditional fiat currencies, particularly the implications continuous money printing can have on inflation and the value of a currency. The finite supply of bitcoin, exactly 21 million, is appealing to investors who want to ensure the long-term value of their investment is secure.
Investors also choose to invest in bitcoin in order to retain personal control of their funds. Known as self-custody, investors can hold their funds in a personal wallet and act as their own bank. They can determine the fee they are willing to pay and the length of the settlement period, as well as instantaneously confirm and make decisions about transactions. Traditional financial institutions do not offer customers the same level of autonomy because they utilize third-parties to verify transactions.
Another reason investors choose to invest in bitcoin is the security protocols associated with the Bitcoin network. Centralized financial institutions have seen a rising number of hack attempts in recent years, and thousands of individual bank accounts can be compromised during an attack. Hacking the Bitcoin network is incredibly difficult, requiring 51% of the total computing power of the network. Unlike traditional financial institutions, Bitcoin hardware wallets, particularly cold wallets, can be taken offline and secured against a digital attack.