Bitcoin’s trying to make 2021 its year. In the first week of January, the digital currency hit multiple record highs after already growing 3X in 2020. But at the beginning of the second week, Bitcoin and other cryptocurrencies lost $200 billion.
One reason for the runup: the pandemic. To try and prop up the flattened economy, the US Federal Reserve is keeping interest rates low, and central banks around the world are printing more money. Over time, that could lead to inflation. To beat that threat, certain investors may opt to buy gold because its value stays the same no matter what happens to other currencies. Same goes for Bitcoin. Which, to some, now looks like digital gold. Also scarcity. There are only 21 million bitcoins out there.
So why the big drop? It’s not that unusual after a big rally. When an asset increases in value too fast, it can spark a price correction (hint: when the price of an overvalued asset decreases by 10% or more) as some investors cash in their quick wins.
What’s next? Some experts predict the price could rise to $50K; others think it could go as high as...wait for it...$318K. Here’s what all this could mean for your wallet.
You and a LOT of other people. Here's what to do before investing:
Know the risks. Not to burst your bubble, but Bitcoin is still pretty new. And not without downsides. See: lack of security and gov regulation. Also, being based on new tech makes it hard to fully understand.
Look into a "safer" option. A Bitcoin exchange-traded fund may make its way to market this year after years of rejection by regulators. Reminder: ETFs are baskets of investments that offer diversification at relatively low prices. So a Bitcoin ETF may help limit the risks of investing in crypto.
Get your financial sh*t together. Before jumping on the Bitcoin bandwagon, make sure you have a solid emergency fund and your debt is under control. And only invest money you’d be okay losing.
Your next move is up to you. You could:
Trade it. For fiat currencies (aka paper money that's backed by the gov). Or other cryptocurrencies like Litecoin and Ethereum, if you like their prospects better.
Spend it. Companies like Microsoft, Square, Paypal, and more are now accepting it as a form of payment.
Hang in there. If you buy the hype about crypto soaring for the rest of the year, hanging onto your investment could be smart.
The short answer: it could affect the global economy and future of money.
Bitcoin is making it easier for people in some developing countries to work around stringent regulations and access capital not regulated by problematic governments. Especially in poorly banked countries and areas with high inflation.
In the same way that paper money eventually replaced gold bars, crypto could one day replace some current forms of payment. But probably not without some tweaks. Bitcoin’s anonymous nature makes it a magnet for things like tax evasion, money laundering, and fraud. Addressing these challenges might mean more regulation.
theSkimm: Even though Bitcoin is in its tween years, it’s still the new kid on the block when it comes to investing. Read: high risk. So proceed with caution. If you’re tempted, make sure Bitcoin fits into your overall financial plan. And that you’ll be okay financially (and emotionally) no matter what it does next.
Skimm'd by: Ivana Pino, Stacy Rapacon, and Elyse Steinhaus