Bitcoin's Long-Term Investment Potential: Is It Worthwhile?

Bitcoin has become a household name, with its value soaring and governments and institutions developing ways to meet their customers' growing demand for exposure. However, it is hard to predict whether it will become the global reserve currency or a store of value as widely accepted as gold.

The short answer to whether or not one should invest in Bitcoin depends on who is asking the question. Bitcoin's price volatility and the lack of regulation in the market make it a risky investment option. However, some individuals believe in the potential of Bitcoin as a decentralised currency and store of value, leading them to consider it a good long-term investment.

Bitcoin's volatility and risk

Bitcoin is a highly volatile asset. Its value can fluctuate dramatically in a short period, and it is vulnerable to being hacked or targeted by criminal activity.

Bitcoin's volatility is due in part to its decentralised nature and the fact that it is not backed by any government or financial institution. Its value is influenced by various factors, including media hype, speculation, and the actions of a few large investors or "crypto whales".

Additionally, Bitcoin's value is affected by the regulatory environment. Changes in laws and policies can cause wild swings in its value. For example, in 2021, Tesla CEO Elon Musk announced that the company had purchased $1.5 billion worth of Bitcoin, causing a boost in its value. However, he later rescinded, citing environmental concerns, and sold off most of Tesla's Bitcoin holdings, which led to a decrease in its value.

Another factor contributing to Bitcoin's volatility is its limited supply. There is a maximum amount of 21 million BTC that can be "mined". This limited supply can lead to significant price fluctuations, especially when compared to traditional currencies, which can be printed at the will of central bankers.

Despite the risks, some experts believe that Bitcoin's volatility can create value and that it has the potential to become a widely accepted global currency in the long term.

To manage the risks associated with investing in Bitcoin, it is essential to have a high-risk tolerance, conduct thorough research, and diversify your investment portfolio.

Long-term growth potential

The cryptocurrency market is notoriously volatile, and Bitcoin is no exception. However, its volatility can be advantageous for long-term investors.

Bitcoin's value is predicted to increase over the long term because, unlike fiat currencies, its supply is fixed. Many investors expect Bitcoin to gain value as fiat currencies depreciate.

Bitcoin is also currently viewed by many investors as "digital gold", a safe-haven investment that can act as a hedge against inflation. Its decentralised nature means it can counter the influence of traditional currencies, which are controlled by central banks.

In addition, the adoption rate of Bitcoin currently outpaces that of the internet at a similar stage in its history, and millions of people now own Bitcoin. El Salvador became the first country in the world to make Bitcoin legal tender in 2021, and other countries are considering following suit.

Bitcoin's blockchain has never been hacked, but individual investors can still fall victim to hacks if they give out sensitive information. It is also important to note that investing in cryptocurrencies carries inherent risks, and it is advisable to conduct thorough research and seek professional advice before making any investment decisions.

Investor profile

The decision to invest in Bitcoin for the long term depends on several factors, including an individual's financial goals, risk tolerance, and investment strategy. Here is an overview of the different investor profiles that may consider long-term Bitcoin investments:

• Risk-averse investors: These investors typically have a low-risk tolerance and prefer investments with less volatility. While Bitcoin can be a risky investment due to its volatile nature, it can still be considered by risk-averse investors as part of a diversified portfolio. By allocating a small portion of their portfolio to Bitcoin, they can gain exposure to the potential upside while managing their overall risk.
• Long-term wealth builders: Investors who are looking to build wealth over time may find long-term Bitcoin investments appealing. Bitcoin has the potential for significant long-term growth, and its fixed supply makes it a hedge against inflation. These investors are willing to hold Bitcoin for several years, even through market downturns, to capture the potential upside.
• Tech enthusiasts: Individuals who believe in the underlying technology of Bitcoin, blockchain, may consider it a long-term investment. They understand the potential impact of blockchain technology on various industries and see Bitcoin as a pioneer in this space. These investors are confident in the long-term prospects of Bitcoin and are willing to hold it through short-term price fluctuations.
• Contrarian investors: Some investors may view Bitcoin as a long-term investment opportunity due to its decentralized nature and its ability to counter the influence of traditional currencies controlled by central banks. They believe that Bitcoin offers a way to diversify their portfolios away from traditional assets and protect their wealth during financial crises or economic downturns.
• Early adopters: With the growing adoption of Bitcoin and the potential for widespread acceptance, some investors want to get in early and benefit from its long-term growth. They recognize the increasing demand for digital currencies and the potential for Bitcoin to become a global reserve currency. These investors are willing to take on the associated risks for the potential of significant returns over the long term.
• High-risk investors: While Bitcoin is considered a risky investment, there are investors with a high-risk tolerance who are comfortable with the volatility. These investors understand the potential downsides but are attracted to the possibility of substantial gains. They actively monitor the market and are prepared to make quick decisions to capitalize on price movements.

It is important to note that investing in Bitcoin is a highly individual decision, and each person's circumstances and risk appetite will vary. Conducting thorough research, understanding the risks, and consulting with financial advisors are crucial steps before making any investment decisions.

Market trends

Bitcoin is the world's largest cryptocurrency by market cap and can be used to make purchases online and off. However, most bitcoin investors view it as a buy-and-hold asset in their investment portfolio. It has become more of a safe-haven investment than a currency, earning it a place within long-term cryptocurrency portfolios.

Bitcoin's price is highly volatile. In 2021, for example, Tesla CEO Elon Musk announced the company had purchased $1.5 billion worth of bitcoin, and that it would accept bitcoin as payment for its cars. This caused a boost in the price of bitcoin. However, Musk later rescinded, citing environmental concerns, and sold off most of Tesla's bitcoin holdings. This caused the price of bitcoin to fall.

Other companies, including Microsoft, PayPal, The Home Depot and Rakuten, accept bitcoin as payment, and some businesses are adding bitcoin to their investment holdings. In September 2022, Colorado became the first state to accept bitcoin for tax payments.

Bitcoin's price is also affected by the broader macroeconomic environment. For example, in the first quarter of 2023, Bitcoin recorded an outstanding performance with a growth of 73%. This was due to a similar economic situation to the 2007-2008 crisis, with central banks rushing to print money to bail out banks in trouble. This increased the demand for Bitcoin, which was seen as a safe haven asset.

In 2024, the price of Bitcoin has continued to be volatile. In the first half of the year, it rose from $16,000 on 1 January to $27,152. However, it has since fallen back to around $20,000. This recent fall has been attributed to a deteriorating macro backdrop, including high inflation and a tight labour market.

Looking forward, it is difficult to predict how Bitcoin will perform in the future as it is influenced by various factors such as market demand, government regulations, technological advancements and investor sentiment. However, some analysts predict that Bitcoin will continue to experience growth and reach higher levels in terms of value and adoption.

Long-term vs Short-term Investment

The relative merits of long-term vs short-term crypto investment are still up for debate. Short-term crypto investment usually refers to purchasing and selling digital currencies over very short periods, such as a few days or weeks. This strategy relies on quick profits from price changes and requires a thorough understanding of market trends and consumer behaviour.

On the other hand, long-term crypto investment involves holding digital currencies for a considerable amount of time, typically years. This strategy attempts to capitalise on the long-term growth potential of the cryptocurrency sector. Long-term investors typically focus on a small number of digital currencies with significant growth potential.

Which approach is preferable depends on a person's financial goals, risk tolerance and financial situation. Short-term crypto investments are riskier but can result in quick returns. Long-term crypto investments are less dangerous but demand patience and a long-term perspective.

Safety and regulation

The safety of investing in Bitcoin depends on your risk tolerance, investment goals, and time horizon. While it is possible to get rich by investing in Bitcoin, it is also possible to lose all your money. Bitcoin is a highly volatile asset, and its value can fluctuate drastically in a short period. Therefore, it is generally recommended for long-term investment horizons.

In terms of regulation, Bitcoin and other cryptocurrencies present a unique challenge for policymakers due to their decentralised and global nature. The regulatory landscape for Bitcoin varies across countries and even within the same country. For example, in the US, the Internal Revenue Service (IRS) treats cryptocurrency as property, while the Commodity Futures Trading Commission (CFTC) considers it a commodity. This lack of consistent regulation can create confusion and increase risk for investors.

To address these challenges, some experts advocate for comprehensive and coordinated policies to protect investors and economies from the risks associated with cryptocurrencies. This includes enhancing transparency, investor protection, and financial stability, as well as preventing illegal activities such as money laundering and financing of terrorism. However, others argue that Bitcoin's decentralised nature is part of its appeal, and over-regulation could stifle innovation.

The regulatory landscape for Bitcoin is constantly evolving, and it is important for investors to stay informed about the latest developments in their respective jurisdictions. While Bitcoin has survived many regulatory changes, its future depends on continued support from its user base and their ability to influence legislative representatives.

Frequently asked questions