As the Bitcoin frenzy intensifies, the cryptocurrency's price is showing no signs of slowing down.
"Bitcoin, having soared above $9,000 over the weekend with year-to-date gains of nearly 800%, is now officially an investor mania," warns Josh Brown from Ritholtz Wealth Management in a blog post. "Like all manias, when it turns, people are going to be wiped out."
Unsurprisingly, as the price of the largest cryptocurrency by market value soars, so is the number of accounts being opened. The operator of the largest U.S.-based Bitcoin exchange Coinbase added an estimated 300,000 users in the last week alone. This means Coinbase has more users than the brokerage Charles Schwab, which reported in mid-November it had 10.6 million active brokerage accounts in October. Coinbase revealed it 11.7 million users at the end of October.
Bloomberg reports that there are 500,000 new Bitcoin users a day. With so many new investors moving in should we look at Bitcoin as a short-term investment, wherein someone can quickly flip it for a profit? Or should it be looked at more as a long-term investment? More dramatically, is it a good time to short Bitcoin?
Quick Trade or Long-Term Hold?
Aaron Lasher, the co-founder of Bitcoin portfolio provider Bread believes Bitcoin is in the final act of a three-year bull market, but it's impossible to tell how high the price will go before this rally is over.
"Many people might see this as an opportunity to make a quick trade, entering the market today and then selling when the price has moved up," Lasher says. "The reality is that this is both the best and the worst time to adopt this strategy. During a rally, the odds are good that new all-time highs will be forthcoming. However, this seemingly easy trade is offset by the significant downside risk: if the market moves against you after a price rally, it can be on the order of 20% to 75%, and can stay at those levels for years."
In other words, buyers could certainly reap huge rewards for dipping a toe in this volatile digital currency but they should be wary of the possibility they could easily get burned.
So what is the best way to make a gain from Bitcoin? Lasher explains, the best way to make substantial gains in Bitcoin is to perform a fundamental analysis of what you think is a realistic total value of all Bitcoin in five to 10 years, and then divide that by 21 million.
"Do you think Bitcoin will be worth $1 trillion in five years?" Lasher says. "That implies a price of about $50,000 per coin. In this case, you should buy Bitcoin at today's price of about $10,000 and be prepared to weather the volatility, holding steady with confidence that your prediction is sound."
Bitcoin is like no other investment. And for the time being, as the buzz around the cryptocurrency builds, the price increases. It is important to be aware that in the past, it has not taken much for the price of Bitcoin to drop suddenly. Nobody really knows how this will play out.
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