Bitcoin is back in the news as it is trading close to its record high. The most popular cryptocurrency in the world has woken up from its multi-year slumber and roared back to life in 2020. Bitcoin has created unprecedented wealth for long-term investors as it was trading at $0.1 back in 2010. That meant you could buy 100 bitcoins worth $10 which would have now been worth close to $1.8 million.
There has been no other asset class that has managed to increase investor wealth at such a staggering rate. However, as we know, historical returns don’t matter much to current and future investors. The question that needs to be answered is if Bitcoin and other cryptocurrencies remain a good bet right now.
The bull case for bitcoin
Bitcoin has been built on a fundamental technology known as the blockchain. It is a decentralized digital currency and offers numerous advantages over traditional fiat currencies for investors seeking to preserve value.
According to a report from the Motley Fool, “Bitcoin owners don't have to worry about the actions of central banks or regulators and their potential impact on its value in comparison to other forms of money. As a result, bitcoin has tended to perform the best when there's doubt about the ability of the traditional monetary system to handle challenging conditions.”
And 2020 has given the world plenty of reasons to doubt the efficacy of the global monetary system. The growing uncertainties surrounding the COVID-19 pandemic has pressurized global economies to a large extent. The unemployment rates of several countries have soared to multi-year highs and governments have pumped in billions of dollars to revive the economy.
The U.S. Presidential election has added to this uncertainty as Donald Trump has refused to concede defeat. Further, discussions about stimulus measures south of the border have come to standstill.
Quantitative easing measures might result in a depreciation of the U.S. dollar which is another driver for the increase in demand for bitcoin. Recently digital payments giant PayPal has expanded its platform to allow trading of cryptocurrencies including Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
We can see why Bitcoin has surged higher in 2020 and it may easily surpass the $20,000 figure by the end of the year.
The bear case for bitcoin
While bitcoin is gaining momentum on the expectation of a digital currency revolution most people around the world remain skeptical of cryptocurrencies. While people believe that only 21 billion bitcoin tokens can be mined, it is not exactly scarce but actually limited by computer programming. There is a possibility that programmers might increase the bitcoin mining limit in the future which means there will be an increase in supply.
While bitcoin benefitted from a first-mover advantage, the barriers to entry in the crypto space are extremely low. You just need to be an expert coder with knowledge of blockchain to develop a cryptocurrency.
According to Warren Buffett bitcoin has no tangible value. In an interview with CNBC, Buffett warned, “Cryptocurrencies basically have no value. They don't produce anything. You can't do anything with it except sell it to somebody else. But then that person's got the problem."
There is no tangible way to value bitcoin as an asset. For example, you can analyze a company’s income statements and balance sheet to come to an investment decision. However, there is no concrete data available for bitcoin investors that provide information about the value of the underlying asset.
Financial experts also believe that the real value is in the blockchain technology that can be easily replicated. Companies such as Mastercard are looking at ways to implement this tech to make payment processing easier and integrate them with fiat currencies.
The slower than expected adoption of bitcoin and other cryptos, regulatory issues as well as rampant use of cryptocurrencies among dark web users have raised questions with respect to mainstream adoption of this asset class.
The Bullish bet
Bitcoin is the first digital token to gain popularity and is the largest cryptocurrency on a market-cap basis. It also serves as an intermediary asset to purchase other digital tokens and is considered as a safe-haven for investors skeptical about the macro-economic uncertainties.
It has also performed well during times when the stock market has experienced duress. Investors view it as a hedge against chaos and 2020 is probably the most chaotic year in the last few decades.
Alternatively, while Bitcoin has been a wealth creator for long-term investors, they have also experienced gut-wrenching drops of 90% in portfolio value several times in the past decade. It might take a few years or even a couple of decades for Bitcoin and cryptos to become mainstream. This means it will remain volatile and may even fall to $0 wiping out all of your wealth.
It sure is an enticing opportunity to invest in digital coins. But it should be viewed as an asset class that is extremely risky and you should invest only how much you can afford to lose.