After touching record highs in November 2021, Bitcoin (CRYPTO:BTC) prices have plunged by almost 50% in fewer than four months. Despite the ongoing decline in cryptocurrencies the BTC token has returned 2,900% to investors in the last five years.
Yes, cryptocurrencies are extremely volatile and speculative in nature. It’s also difficult to fundamentally value cryptocurrencies compared to asset classes such as equities or bonds. While the real-world utility of these blockchain networks is increasing, it might be difficult to pick a winner, given there are over 13,000 digital tokens in circulation right now.
With these factors in mind, let’s see if Bitcoin deserves a place in your investment portfolio.
The bull case for Bitcoin
Bitcoin was the first cryptocurrency to be launched back in 2008, and it was the spark that fueled the fire. Its white paper explained how a blockchain network can be used to create and build a peer-to-peer online payments system without the need for an intermediary.
It means merchants and consumers can execute transactions directly, lowering associated costs and payment delays. For example, a merchant may have to pay as much as 3% to banks or payment facilitators such as Visa or Mastercard, which negatively impacts the bottom line. It also takes a few days for the payment to be reflected in the merchant’s bank account.
While Bitcoin has not replaced traditional financial institutions yet, it has grown in popularity over the past decade. Right now, it’s viewed as a store of value and is held by several publicly listed companies on their balance sheet.
Bitcoin is valued at a market cap of US$733 billion and accounts for 40% of the total crypto market. It continues to enjoy a first-mover advantage and remains the most valuable digital asset by a mile.
Bitcoin’s rising hash rate indicates its blockchain network has improved security over the years. A hash rate is the measure of computing power used to verify transactions. Further, the total number of Bitcoin in circulation is limited to 21 million coins, making it anti-inflationary in nature.
While a handful of retail investors held BTC tokens back in 2010, right now, around 40 million accounts have exposure to Bitcoin. This number has grown at an annual rate of 21% in the last three years and is poised to move higher in the upcoming decade.
Several institutional investors who were cryptocurrency skeptics have now allocated a small portion of their portfolio towards Bitcoin and other tokens.
The Foolish takeaway
If you are someone with a low-risk tolerance, or don’t have enough capital to invest in cryptocurrencies, this highly disruptive asset class is not a fit for your portfolio. Alternatively, given the widespread adoption of Bitcoin and other cryptocurrencies, I am cautiously optimistic about the long-term prospects of quality digital tokens that have the potential to expand their ecosystem over time.
While cryptocurrencies are speculative right now, they may develop utility over the years, making these tokens investible and low risk in nature. In a nutshell, Bitcoin could well be extremely lucrative at current prices, but it’s not the right investment for everyone. You should invest as much as you can afford to lose in BTC and other digital tokens.
