Bitcoin's Long-Term Investment Potential: Smart Move Or Not?

Bitcoin is a cryptocurrency with a decentralised structure, built on blockchain technology. It has been one of the best investments over the last five years, but it is also incredibly volatile. So, is it a smart long-term investment?

Bitcoin's value has skyrocketed in recent years, and it has the potential to be a non-correlated asset, similar to gold. However, its volatile nature means that its peaks tend to be followed by sharp declines. For example, in 2018, Bitcoin lost nearly half its value after reaching an all-time high in 2021.

Some experts believe that Bitcoin is a good long-term investment, citing its potential as a store of value and its role in the evolving digital economy. Others, like Warren Buffett, are sceptical, arguing that Bitcoin lacks utility and is highly speculative.

While Bitcoin has the potential to be a smart long-term investment, it is essential to approach it with caution. It is a risky investment, and investors should carefully consider their risk tolerance and financial position before deciding.

Bitcoin's volatility

Bitcoin is known for its volatility, and its ascent has not been linear. While it has offered the potential for high returns, it has also experienced significant drops in value. For example, someone who bought Bitcoin in 2013 would have seen their investment tumble 80% and it wouldn’t be above water for another three years. There was also a decline in 2018 that lasted about a year, and drops of 50% or more in 2021 and 2022.

Other factors contributing to Bitcoin's volatility include its decentralised nature, its limited history as an asset, and its susceptibility to market sentiment and investor activity.

Despite its volatility, some experts believe in Bitcoin's long-term potential as a store of value and as an alternative payment system, particularly in developing countries. They also believe in the future of blockchain technology and its potential to become a bigger part of the economic ecosystem.

If you are considering investing in Bitcoin, it is important to remember that it is a risky investment and you should be prepared for big downturns. It is recommended that you do not invest more than you can afford to lose and that you maintain a diversified portfolio that includes several different types of investments to reduce your overall risk exposure.

Bitcoin as a savings technology

Bitcoin is a digital currency built on blockchain technology. It was created in 2008 and is the most popular cryptocurrency and the largest by market capitalization. Bitcoin is a decentralised currency, meaning it does not require a third party, such as a bank, to verify transactions.

Bitcoin has been described as a "savings technology" by some. This is because there is a finite amount of Bitcoin, with a fixed supply of 21 million units. This built-in scarcity means that, unlike fiat currencies, Bitcoin cannot be devalued by printing more.

Bitcoin has been one of the best investments over the last five years, with a 450% run-up in value over that time period. However, it is also incredibly volatile, experiencing significant increases in value followed by quick decreases. For example, in 2018, Bitcoin lost nearly half its value after reaching an all-time high in 2017.

Due to its volatility, investing in Bitcoin is risky, and it is generally recommended only for those with a high-risk tolerance and who are in a strong financial position. If you are considering investing in Bitcoin, it is important to do your research and understand the risks involved. It is also recommended to maintain a diversified portfolio and not invest more than 10% of your portfolio in risky assets like Bitcoin.

While Bitcoin has the potential to be a good long-term investment, there is no way of knowing for sure. It is a very young asset with little history, and its value can decrease sharply. As such, investing in Bitcoin should be approached with caution.

Bitcoin's correlation with the S&P 500

Bitcoin is a cryptocurrency built on blockchain technology. It is the most popular cryptocurrency and the largest by market capitalization. Bitcoin has exhibited high volatility, with drastic swings in value, making it challenging for crypto traders to navigate.

The S&P 500 is a stock market index that tracks the performance of 500 leading companies listed on U.S. stock exchanges. It is considered a barometer for the U.S. economy and is known for its consistent historical performance and diversification across industries.

Over the past decade, Bitcoin has shown a correlation of 0.17 with the S&P 500, which is lower than other alternative assets. This correlation has been increasing in recent years, with a five-year correlation of 0.41. Bitcoin's relationship with the S&P 500 shifted from a negative correlation of -0.76 in November 2023 to a positive correlation of 0.57 in January 2024, indicating a change in investor perception.

The correlation between Bitcoin and the S&P 500 can be influenced by factors such as inflation numbers and interest rate decisions by central banks. When the correlation increases, it suggests that Bitcoin is behaving more like a risk-on asset. Additionally, if institutional and retail investors are active in both equity and cryptocurrency markets, their simultaneous buy and sell decisions could further align the price movements of these assets.

Bitcoin and the S&P 500 tend to thrive during periods of loose monetary policy, when central banks stimulate the economy through measures like interest rate cuts and quantitative easing. This environment boosts asset markets by increasing liquidity and lowering borrowing costs, attracting investors to both traditional and crypto markets. However, when central banks tighten monetary policy, it can dampen market enthusiasm and impact asset prices.

While Bitcoin's correlation with the S&P 500 has historically been low, it is important to monitor their relationship as it can provide insights into market sentiment and influence investment strategies.

Bitcoin's utility

Store of Value and Inflation Hedge:

Bitcoin has a fixed supply of 21 million units, unlike fiat currencies, whose supply can be increased by central banks, leading to inflation. As a result, Bitcoin is seen as a potential long-term store of value, similar to gold, which can retain its value during recessionary markets.

Peer-to-Peer Electronic Cash:

The original premise of Bitcoin was to become a peer-to-peer electronic cash system that could disrupt existing fiat currencies and the traditional global payment networks. Bitcoin allows for direct payments between two parties without the need for intermediaries like banks, reducing fees and processing time.

Decentralization and Censorship Resistance:

Bitcoin is decentralized, meaning it is not controlled by any central authority. This feature makes it censorship-resistant, as no single entity can prevent transactions or block access to the network. This was highlighted during the Canadian trucker protests in 2022, where Bitcoin donations played a role in circumventing financial restrictions.

Cross-Border Transfers:

Bitcoin can be easily transferred across borders without the need for currency exchange or the risk of confiscation, making it convenient for individuals moving between jurisdictions or seeking to protect their wealth in unstable political or economic environments.

Energy Grid Stabilization:

Bitcoin mining acts as a stabilizing force on energy grids. Miners are incentivized to use the most efficient energy sources, leading to innovations in green energy and the utilization of wasted energy.

Accessibility and Availability:

The Bitcoin network has an impressive uptime of 99.99%, operating 24/7 without holiday closures. This availability, combined with its decentralized nature, makes Bitcoin accessible to anyone with an internet connection, regardless of their location or political affiliation.

Micropayments and Internet Commerce:

Bitcoin's scaling layers, such as the Lightning Network, enable micropayments and disrupt traditional e-commerce models. This allows for new revenue streams for content creators and a more engaging experience for consumers, who can pay for content without providing personal or financial information.

Bitcoin's future

On the other hand, Bitcoin is incredibly volatile, and its peaks tend to be followed by sharp declines. For example, after reaching an all-time high of over $60,000 in 2021, Bitcoin's value fell by 75% by the end of 2022. Bitcoin also lacks the underlying fundamentals of stocks, such as cash flows, profits, and tangible assets, to support its valuation. As a result, it has exhibited significant price fluctuations, making it a highly speculative investment.

Given these factors, Bitcoin's future will likely depend on how it is adopted and regulated. If Bitcoin continues to gain acceptance as a means of payment and more people adopt blockchain technology, its value could increase. However, if it faces increased regulation or competition from other cryptocurrencies, its value could decrease.

Overall, while Bitcoin has the potential to be a good long-term investment, it is essential to approach it with caution and maintain a diversified portfolio due to its high volatility and uncertain future.

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