Bitcoin's Future: Safe Long-Term Investment?

Bitcoin is a highly controversial topic, with some people believing it is a good long-term investment, while others believe it is not safe. On one hand, Bitcoin is the most popular and largest cryptocurrency by market capitalization, and it has shown to stand the test of time. On the other hand, it is incredibly volatile and experiences significant run-ups in value, followed by quick decreases. It is also not regulated by the FCA, and investors are unlikely to be protected if something goes wrong. So, is Bitcoin a safe long-term investment?

Bitcoin's value in the next decade

The Bullish Case for Bitcoin:

Bitcoin has experienced exponential growth and maintained its position as the most valuable cryptocurrency. Analysts who are bullish on Bitcoin's long-term prospects argue that it offers a unique value proposition as a decentralized, seizure-resistant, and finite asset. Senior analyst Nicholas Sciberras from Collective Shift predicts a bullish outlook for Bitcoin due to inflation, the US government's need to print more money, and the potential for Bitcoin ETF approval. Bitcoin's finite supply of 21 million units is often cited as a reason for its potential long-term appreciation in value, especially in an inflationary environment.

The Bearish Case for Bitcoin:

On the other hand, Bitcoin's extreme volatility, complex nature, and lack of regulatory oversight make it a risky investment. The value of Bitcoin is purely based on speculation, and there is no underlying asset backing it. Additionally, governments and financial regulators worldwide have warned about the risks of investing in cryptocurrencies, and some countries have even taken steps to restrict their use. The Bank of England's governor, Andrew Bailey, warned that people investing in cryptocurrencies should be prepared to lose all their money.

Bitcoin's volatility

Bitcoin is known for its volatility, which is a defining factor of cryptocurrency. While investors may make high returns, they could also lose everything.

Bitcoin's exponential growth and ability to maintain its position as the most valuable cryptocurrency can mask the fact that its ascent has not been linear. For example, someone who bought Bitcoin in 2013 would have seen their investment tumble 80% and it wouldn't have been above water for another three years. There were also drops of 50% or more in 2021 and 2022.

Despite these downturns, Bitcoin has historically offered the potential for high returns. In 2024, it hit new record highs, rising above $70,000 for the first time. According to Investopedia.com, Bitcoin had a price of $7,167.52 on 31 December 2019, and a year later, it had appreciated more than 300% to $28,984.98.

The price of Bitcoin is also influenced by its limited supply, as there will only ever be 21 million units of Bitcoin. This scarcity can drive up demand and price. However, it's important to note that scarcity does not always imply value, as large drops in Bitcoin's value have been observed.

Overall, Bitcoin's volatility is a key characteristic that investors should consider when deciding whether to invest in the long term. While it offers the potential for high returns, it also comes with significant risks and the possibility of substantial losses.

Bitcoin as a savings technology

Bitcoin is a unique type of investment, often described as a "savings technology". It is a decentralised, digital currency built on blockchain technology. This means that it is not controlled by any central authority, like a bank or government, and its transactions are recorded on a digital ledger.

Bitcoin's value is derived from its limited supply, its ability to be traded globally, and its resistance to seizure. With a finite number of 21 million units, it offers built-in scarcity, which can be appealing to investors. Its decentralised nature also means that it is not subject to the same inflationary pressures as traditional currencies, as its supply cannot be increased by a central authority.

The value of Bitcoin has experienced significant fluctuations since its creation in 2007. It has seen exponential growth, reaching new record highs in 2024, but has also suffered dramatic drops, losing more than 75% of its value in 2022.

Bitcoin's decentralised nature also comes with risks. Its transactions are irreversible, and it lacks the consumer protections offered by traditional financial institutions. Additionally, its value is highly speculative, and it does not have any underlying assets or revenue streams to support its valuation.

Despite the risks, some analysts remain bullish on Bitcoin's long-term prospects. They argue that Bitcoin's unique properties make it a viable alternative to traditional currencies and assets. Its decentralisation and limited supply can make it attractive as a store of value, especially in an era of increasing inflation and declining trust in traditional currencies.

For investors considering Bitcoin, it is essential to recognise its high-risk nature. It is recommended to only invest what one can afford to lose and to maintain a diversified portfolio that includes other types of investments to reduce overall risk exposure.

Bitcoin's status as a global reserve currency

Arguments in favour of Bitcoin as a global reserve currency:

• Bitcoin is decentralised, giving power to its holders and making it "seizure-resistant".
• Bitcoin is not kept in a traditional bank, and its security is controlled by its owners, who can choose from a variety of cold wallets to store their Bitcoin.
• Bitcoin has a capped supply of 21 million, meaning that money printing and runaway inflation are not possible.
• Bitcoin can be sent anywhere globally within seconds to minutes, for a fraction of the cost of fiat currencies.
• Bitcoin is decentralised and not subject to the arbitrary policies or needs of governments, third parties, or those with corrupt intent.
• Bitcoin is highly secure and transparent.
• Bitcoin is owned by no one, creating a more level playing field between countries, corporations, and people.
• Bitcoin is ultra-portable, with billions of dollars' worth able to be transported on a small device like a USB or mobile phone.
• Bitcoin checks all the boxes of a successful currency, including scarcity, divisibility, acceptability, portability, durability, and fungibility.

Arguments against Bitcoin as a global reserve currency:

• Bitcoin is incredibly volatile, experiencing significant fluctuations in short periods.
• Central banks and governments, who are crucial in determining reserve currencies, may be hesitant to embrace a decentralised cryptocurrency like Bitcoin due to concerns about control, stability, and monetary policy.
• Bitcoin is not yet widely used in everyday transactions to the same extent as traditional currencies.
• The future of Bitcoin remains uncertain, and its acceptance and adoption may vary based on regulatory developments, market behaviour, and consensus among governments and financial institutions.
• Bitcoin's limited scalability and regulatory uncertainties present significant challenges to its status as a global reserve currency.

While Bitcoin has many desirable characteristics of a reserve currency, it also faces several obstacles and uncertainties. It is challenging to predict whether Bitcoin will become a global reserve currency, but it is undoubtedly a fascinating topic to follow as the cryptocurrency space evolves.

Bitcoin's advantages and disadvantages

Bitcoin is a decentralised, digital currency built on blockchain technology. It is the most popular and stable cryptocurrency, and the largest by market capitalisation.

Advantages

• Bitcoin is a "seizure-resistant" asset, not kept in a traditional bank.
• It is a trustless alternative to traditional currencies, as it is not controlled by any state or centralised power.
• It is a neutral international currency, not influenced by any one nation-state.
• It is traded globally and can be stored and transferred digitally at almost no cost.
• It is divisible, allowing for fractional shares to be purchased.
• It is a store of value similar to gold.
• It can be used as a means of payment, particularly for large cross-border payments.
• It has the potential to be a non-correlated asset, meaning it may not follow the trends of other assets.
• It has a finite supply, which is baked into its code.

Disadvantages

• It is incredibly volatile, experiencing significant run-ups in value followed by quick decreases.
• It is a complex, high-risk investment.
• It is not regulated, and investors are unlikely to be protected if something goes wrong.
• It is not widely accepted as a form of payment.
• It is not backed by any underlying asset, so its value is based purely on speculation.
• It is not as safe as a traditional investment, like an index fund.
• Transactions are irreversible.
• It is difficult to scale a public blockchain, limiting the number of transactions per second.
• As mining becomes more difficult, the amount of computing power needed increases, cutting out smaller players.
• It does not generate revenue or issue dividends.

Frequently asked questions