about 3 years ago • 4 mins
Bitcoin marked another milestone this past week with Tesla’s announcement that the electric vehicle maker was investing in the cryptocurrency – and would soon accept it as a form of payment. But with prices now nearly five times higher than they were a year ago, is bitcoin still worth buying?
After years of relative obscurity and one notable false start, bitcoin now appears to be gaining broader acceptance at a rapid rate. Investors for their part, have finally started to shift their focus away from the cryptocurrency’s speculative possibilities and towards its long-term value proposition – which in my view remains underappreciated.
It’s impossible to cover the full thesis in a short Insight, but there are essentially four factors that make bitcoin an interesting investment idea.
Rightly or wrongly, bitcoin is seen by many as a hedge against the unintended consequences of current economic stimulus policies – which could include high inflation, currency devaluation, and negative interest rates. According to the bond boss at BlackRock, the world’s largest investment manager, the best way to ride out such a scenario is to “hold an asset that maintains its real value – an asset that cannot be printed”. As discussed below, bitcoin might just be the most likely candidate.
But bitcoin isn’t only attractive in extreme economic environments. As shown in the chart below, even moderate inflation erodes the long-term purchasing power of fiat currencies. The longer your investment horizon, the more dangerous it is to ignore this fact.
This is a controversial one, given its notorious volatility, but proponents view bitcoin as being like a digital version of gold – only better. While you could cite several reasons in support (it’s easily portable, transferable, and divisible, and can’t be counterfeited), what makes bitcoin really special is that its supply is completely independent of demand.
While demand for the cryptocurrency is booming, new supply is inherently programmed to shrink – and you don’t need a degree in economics to know what that imbalance might mean for its price. An added factor in bitcoin’s favor as a store of value, particularly given the point we looked at above, is that governments can’t easily seize or control it.
An undersung aspect is bitcoin’s potential to become a “settlement” system for large financial transactions between banks and businesses. Not only could it be faster than the current setup (settling payments in a few hours rather than a day), but using bitcoin may be cheaper, particularly for cross-border transactions, and safer too thanks to the lack of any requirement for intermediaries and consequential risk.
While challenges remain, the technology here keeps improving – and according to a report from ARK Investment Management, capturing just 10% of global settlement volumes could give bitcoin a $1.5 trillion market value.
Tesla adding bitcoin to its balance sheet is a big deal. While other large companies like MicroStrategy have previously invested sums in the cryptocurrency, the fact that one of the biggest and most innovative companies in the world has made the leap could well prompt others to follow.
The fact is that bitcoin, at least in terms of ownership, is becoming more mainstream. Only a year or two back, investing in bitcoin was a huge career risk for CEOs and money managers. Today, the bigger risk is ignoring it.
In my view, buying bitcoin is no longer just a speculative play. As set out above, it offers realistic solutions to important problems – and yet people have only recently started to realize its long-term potential.
Don’t get me wrong: bitcoin remains a volatile asset, and it could readily shed half its market value in the space of a few months or weeks. But for me, the cryptocurrency’s long-term thesis is strong, regardless of certain shortcomings in regard to, say, its use as a means of payment.
And as an investor, bitcoin is simply getting increasingly difficult to ignore. With a long enough horizon, buying some today might not turn out to be as expensive as it seems – and in the grand scheme of things, you might still turn out to be one of the cryptocurrency’s early adopters…
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.