Is Bitcoin a Good Investment Long Term?

Bitcoin, the world's first and largest cryptocurrency, has carved a unique niche in the financial landscape. Its decentralised nature and potential for high returns have attracted investors and traders alike. But is Bitcoin a good investment, particularly for those in Singapore? This article delves into the intricacies of Bitcoin investment, guiding you through the potential benefits and risks to help you determine if it deserves a place in your portfolio.

Deciding whether to invest in Bitcoin requires careful consideration of your financial situation, risk tolerance, and investment goals. In Singapore, where investors often lean towards stability and regulated markets, Bitcoin's volatility and decentralised nature can seem daunting.

Investing in Bitcoin is generally advisable only if:

• You have a high risk tolerance.

• You are in a strong financial position.

• You can afford to lose some or all of your investment.

If you choose to invest, remember that diversification is key. Maintain a balanced portfolio that includes various asset classes to mitigate your overall risk exposure. As a general rule, limit your investment in volatile assets like Bitcoin to no more than 10% of your total portfolio.

>> More: How to Buy Bitcoin in Singapore.

For those new to the world of cryptocurrency, understanding the pros and cons of Bitcoin investment is crucial.

• Potential for high returns: Bitcoin has historically delivered significant returns, attracting investors seeking substantial gains. In December 2024, Bitcoin's price surged past US$100,000, showcasing its potential for eye-popping yields (its closing price 3 years before was US$40,000; 5 years before, it was US$6,612). However, past performance is not indicative of future results.

• Decentralisation: Bitcoin operates independently of central banks and governments, offering a potential hedge against traditional financial systems.

• Hedging against inflation: Some proponents believe Bitcoin's finite supply could offer a hedge against inflation, similar to gold. However, this remains a subject of debate as Bitcoin's correlation with inflation has been inconsistent historically. Further research and analysis are needed to determine its true effectiveness as an inflation hedge.

Bitcoin's growing popularity and increasing institutional interest suggest that its value could continue to rise in the long term.

>> More: Should You Use a Credit Card to Buy Cryptocurrency?

• High volatility: Bitcoin's price is notoriously volatile, with dramatic price swings occurring frequently. This volatility can lead to significant gains but also substantial losses. For example, Bitcoin experienced an 80% drop in 2013, highlighting the extreme fluctuations investors may face.

• Lack of regulation: The cryptocurrency market in Singapore, while evolving, still lacks the comprehensive regulation seen in traditional financial markets. For instance, there is no equivalent of the Securities Investor Protection Corp. or the Federal Deposit Insurance Corp. to protect investors in case of platform failures

• Security risks: Storing and managing Bitcoin comes with security challenges. Hacks, scams, and the potential for loss due to forgotten or stolen wallet credentials are real concerns.

It's important to remember that Bitcoin is a speculative asset, and its price fluctuations are often driven by sentiment and market speculation.

Bitcoin defies easy categorisation. Unlike stocks or bonds, it doesn't represent ownership in a company or a debt obligation. It doesn't generate revenue, issue dividends, or have a centralised governing body.

To elaborate, Bitcoin operates on a decentralised network, with no single entity controlling its operations. Its value is derived from its scarcity, the underlying technology (blockchain), and market demand. This makes it fundamentally different from traditional investments that are tied to tangible assets or company performance.

Some argue that Bitcoin is a commodity, similar to gold, due to its finite supply. Others believe it's a currency, although its use for everyday transactions remains limited in Singapore. It's also possible that Bitcoin represents an entirely new asset class.

>> More: How Bitcoin & Other Cryptocurrencies Work.

Bitcoin's unique characteristics and its relatively low correlation with traditional asset classes like stocks and bonds suggest it could offer benefits when it comes to diversifying portfolios. However, it's essential to consider that Bitcoin's correlation with traditional markets in Singapore may behave differently due to local market conditions and regulatory factors. 

For example, while Bitcoin has shown periods of non-correlation with the S&P 500 in the past decade, it also experienced a significant downturn alongside the stock market in 2022. This suggests that Bitcoin is not entirely immune to broader market trends.

Furthermore, regulatory developments in Singapore, such as potential restrictions on cryptocurrency trading or taxation, could impact Bitcoin's performance and its correlation with other assets. Investors should closely monitor the evolving regulatory landscape and consider its potential implications for their portfolios.

Bitcoin's volatility is undeniable. Its price can fluctuate dramatically in short periods, posing significant risks for investors.  Compared to other investments commonly held by Singaporean investors, such as REITs or stocks, Bitcoin's volatility is considerably higher.

Before investing in Bitcoin, carefully assess your risk tolerance and investment goals. If you're uncomfortable with high volatility, Bitcoin may not be suitable for you. However, if you're willing to accept the risks and believe in Bitcoin's long-term potential, it could be a worthwhile addition to your portfolio.

Remember, thorough research and careful consideration are essential before investing in any asset, especially one as volatile and complex as Bitcoin.