Itâ€™s 2017 all over again as Bitcoin sees another tremendous surge in value. The cryptocurrency has tripled in value since September 2020. Does the latest move mean it merits a place in your portfolio?
A Store Of Value
One of the key attributes of Bitcoin is as a store of value. Thatâ€™s especially important when the Fed is prioritizing low rates over potential inflation for now, and the government is handing out stimulus checks. These actions could lead to the dollar to decline in value over time. When that happens, as we saw in the 1970s, holding onto real assets can be a valuable investment strategy. Gold, other commodities and a real estate can all preserve their value at times of currency weakness.
Perhaps Bitcoin can be added to that list. Bitcoin is also somewhat unique in that supply is capped. Generally, if the price of gold rises, then gold miners spend more hunting for new supply, this can moderate price rises over time. With Bitcoin supplies are capped irrespective of price. This is trait Bitcoin bulls favor. When the price rises, there isnâ€™t a natural way to obtain Bitcoin other than to find a willing seller.
However, there are risks too. Bitcoin is not a productive asset. This makes it hard to value, and can account for its large swings in price. This is in contrast with a company like Apple
A Challenging Valuation
With Bitcoin, just as with gold, things are harder to define. The assetâ€™s value is not determined by a cash return. However, that cuts both ways, critics could argue the valuation is far lower, but thereâ€™s also room for a higher valuation too since thereâ€™s no obvious basis from which to value Bitcoin.
Indeed, as Bitcoin surges, the attention it attracts may cause returns to improve still further as more buy in. That may be helpful as few institutional investors hold Bitcoin in material size at this point.
2017 All Over Again
Itâ€™s important to remember, though, that price volatility has two sides. In 2017 Bitcoin surged around twenty-fold from the lows of that year. However, the gains were short-lived, the price then fell 85% from the top over the course of the next year, had you been unlucky enough to buy at that top. Of course, Bitcoin has still had an impressive bull run, but the swings along the way have been turbulent.
So those excited by Bitcoinâ€™s epic price surges should understand that major declines have been part of its history too. Nonetheless, the current surge and the potential weakness of the dollar over the coming years may continue to cause Bitcoin to attract greater attention from mainstream investors.
The fact that Bitcoin is under-owned by many investors could form a long-term bull case for the cryptocurrency, though much like gold it is among the harder assets to truly assess where its value really lies.