Amid meme mania and tech startup frenzy, bitcoin hit new highs in late 2021, topping just over $68,000 per coin. Since then, the price has dropped nearly 50% in volatile trading by the start of the new year. The spectacular rise and fall of Bitcoin has left many wondering if it is too late to invest.
However, if you shrink the historical timeline, many will think that we are still in the early days of technology that can change the world. Investment in bitcoin in early 2017 would have risen over 3500% at today’s prices, even after the recent drop. According to Adam Smith, author of The Crypto Adviser, “cryptocurrency has been one of the best-performing asset classes over the past decade, despite a regular stream of negative press coverage associated with a lack of understanding of cryptocurrency and blockchain technology.”
Here are three things to consider if you are thinking about buying Bitcoin in 2022.
Watch out for institutional adoption
Over the past few years, Bitcoin has strengthened in the economy, indicating optimism about its future prospects. Elon Musk is no stranger to cryptocurrencies and disputes. He announced that Tesla acquired $1.5 billion worth of bitcoin in early 2021. In addition, many major financial platforms such as Paypal and Robinhood allow users to buy and sell bitcoins.
Bitcoin has even gained acceptance as a legal currency. “Last year, El Salvador decided to make bitcoin legal tender. As other countries such as Paraguay and Turkey seek to do the same, Bitcoin has a great future,” said Stefan Atelievich, an entrepreneur in the crypto space.
Perhaps the most important step towards accepting Bitcoin as a legitimate asset class is the approval of the first Bitcoin Futures ETF, which allows investors to access Bitcoin through futures contracts.
Currently, Bitcoin represents a tiny fraction of all investment assets held by hedge funds, pension funds, retirement accounts, and the like. If trends towards wider institutional adoption continue, this increase in demand could drive up the price of bitcoin. In an interview with Barron’s, Cathy Wood of ARK Invest believes that if institutional investors add 5% to Bitcoin, the price could easily rise to the $400,000 to $500,000 range. Even famed hedge fund manager and crypto skeptic Ray Dalio wrote that “Bitcoin has succeeded in going from being a highly speculative idea to something that could have value in the future.”
Focus on the long term
In the short term, volatility reigns. The future of Bitcoin is still murky and any new information could cause big price fluctuations. Investors who bought bitcoin at the peak of the previous spike in December 2017 would see its value drop by almost 84% over the next year. However, those who held on saw prices more than triple over the next five years.
Bitcoin has been compared to investing in the Internet in its early days, and investors should have the same long-term outlook. “Investing in bitcoin is equivalent to investing in the internet in the mid-90s,” said Michael Denny, CIO of The Investment Nerd. “The potential is so great that it is difficult to overestimate it, but, as with the Internet, it will take many years to fully unleash it, so patience is needed.”
Another long-term narrative for Bitcoin is its potential use as an inflation hedge, similar to real estate or gold. Keegan Francis, Finder.com’s cryptocurrency editor, notes the growing popularity of bitcoin as “digital gold”. He says: “Bitcoin’s current market capitalization is around $1 trillion. With a market capitalization of gold above $10 trillion, Bitcoin has the potential to rise 10x from its current valuation, bringing the price of one bitcoin to around $500,000.”
Understanding Potential Risks
While the potential future of Bitcoin looks bright, there are risks that investors should be aware of before making a purchase. Francis adds that “Bitcoin is, relatively speaking, a new asset. The market has only been around for about ten years and is therefore more prone to manipulation and volatility.”
Given the relative newness of the cryptocurrency market, the looming risk lies in possible government regulation. There have already been crackdowns in countries such as China, where cryptocurrencies have been completely banned in favor of their own central bank digital currency based on the yuan. In the US, the rules are mostly made at the state level, and there is confusion. While an outright ban is unlikely, government regulation may deter some uses of bitcoin. On the other hand, laws governing cryptocurrencies could prove beneficial to Bitcoin in the long run. According to an analysis of survey data by Business Insider, more than 52% of multinationals cite the lack of clarity in regulations as a reason why they refrain from participating in cryptocurrency and blockchain projects.
The same study noted another risk of investing in bitcoin — cybersecurity threats. In 2021, users lost a record $14 billion to cryptocurrency-related crimes, including hacking and other types of fraud. While the decentralized nature of Bitcoin is one of its major innovations in consumer privacy, this same innovation makes recovering a lost or stolen cryptocurrency very difficult.
It’s not too late to invest wisely
If you’re willing to hang on long term, Bitcoin has proven to be a strong investment so far. According to Kyle Asman, co-founder of New York-based investment bank BX3 Capital, “We are still at the start of the bitcoin rally as the metaverse and digital world continue to grow. I would recommend everyone to keep 1-2% of their net worth in bitcoin.”
Keegan Francis agrees, noting that Bitcoin is an asymmetric investment where the upside is far greater than the downside. He says that while there is a possibility of a loss of 50% or more in any given year, the value of Bitcoin has been consistently rising over a longer period of time. “If investors are willing to commit to holding bitcoin for a few years, there is historically a good chance they will make a profit on the investment.”
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