If you were to have invested $1,000 in a mutual fund tracking the S&P 500 Index in March 2011, your investment would now be worth $3,416 today.
However, if you were to have invested that same $1,000 in Bitcoin in March 2011, your investment would now be worth more than $55 million.
Indeed, the price of a single Bitcoin was trading for as little as $1 in March 2011 but is now worth more than $59,000 each. Despite its volatility, Bitcoin has delivered an average annualized return of 230%, compared with the average annualized return of the S&P 500 of 13.6%.
Of course, comparing the performance of an index mutual fund with that of a cryptocurrency is not a fair assessment, as the asset classes are completely different.
However, with the rising price of Bitcoin, and with news continuing to be issued from large, well-known companies, the question arises whether Bitcoin makes for a good investment.
More importantly, is it too late to buy?
Though controlled by a decentralized network with a transparent set of rules, cryptocurrencies derive their value not from a government-controlled central bank but rather from their scarcity, divisibility, utility, and other factors.
The key to the maintenance of a currency's value is its supply. When Bitcoin was launched in 2009, its developer(s) stipulated in the protocol that the supply of tokens would be capped at 21 million.
The current supply of Bitcoin is over 18 million, and with the rate at which Bitcoins are released, decreasing by half roughly every four years, the supply should surpass 19 million in the year 2022.
Let’s have a quick look at some of the reasons to consider buying cryptocurrencies.
Due to the number of trading platforms and exchanges, Bitcoin and several other cryptocurrencies are very liquid investments, as they can be purchased and sold 24/7 globally.
Bitcoin and other cryptocurrencies are immune to inflation because they are not part of a nation’s money supply.
New cryptocurrencies are coming to market regularly, in addition to new trading platforms, digital wallets, and other technologies and integrations.
Transactions are instantaneous. There is no need for settlement, which usually requires a few days.
The lack of regulation of Bitcoin and other cryptocurrencies certainly makes them more appealing. However, why the sudden price spike since the end of last year?
The run-up most likely had to do with the uncertainty facing the U.S. election outcome, and while President Biden has been in office for several months, uncertainty over the economy still persists.
Some believe that the COVID-19 vaccine may not necessarily return things back to normal, and others believe that governments around the world have hit their limits with bailouts. As such, Bitcoin and cryptocurrency investors hold more faith in vehicles that aren’t backed or regulated by governments.
In early February, Tesla announced its commitment to purchase $1.5 billion Bitcoin and to begin accepting it as a payment method for its products. More than a vote of confidence for the cryptocurrency, this is market-moving news because it’s a public corporation making the purchase—not simply a single investor, such as Tesla’s billionaire founder—thereby requiring an SEC filing.
Additionally, Visa announced yesterday that it will allow the use of the cryptocurrency USD Coin to settle transactions on its payment network. (USD Coin, or USDC, is a cryptocurrency whose value is pegged directly to the U.S. dollar.) Though not Bitcoin, this announcement furthers the commitment to cryptocurrencies by the mainstream financial industry—especially a company like Visa that is relied upon by Main Street, not just Wall Street.
Price volatility might be the single reason to spook investors away from Bitcoin and cryptocurrencies. However, as the Bitcoin market is maturing—with more trading platforms, more participants, and more acceptance—it has become easier for investors in traditional financial instruments and asset classes to consider incorporating cryptocurrencies into their investment portfolios.
Perhaps all can agree that a retirement portfolio or a child’s college fund should not be invested 100% in Bitcoin and cryptocurrencies. However, for those who are familiar with the high-risk nature of non-traditional investments and can accept wild swings in price, Bitcoin and cryptocurrencies can serve to boost the performance of a portfolio.
Bitcoin is here to stay, and for those willing to incorporate some risk into their portfolios, cryptocurrencies could be just what the doctor ordered.
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