The Case for and Against Investing in Bitcoin

With bitcoin trading at more than $40,000 apiece last week—and quintupling in value over the past year—the question arises for investors: Get in or stay out?

There are plenty of reasons for caution. The virtual currency’s value has soared and plunged repeatedly since its introduction in 2009. It fell 52% just from Feb. 13 to March 11 last year.

And, while bitcoin is referred to as a digital currency, it doesn’t meet at least one important criterion of a currency: It lacks widespread usage as a medium of exchange in legitimate commercial transactions. In November, digital-payment processors handled just $269.7 million of merchant sales world-wide in bitcoin, according to research firm Chainalysis. By comparison, total U.S. retail sales registered $546.5 billion in November.

Many pros think individual investors should steer clear of the currency entirely. But others suggest investors would do well to consider adding bitcoin to their portfolio—but generally only as a small percentage of their overall assets.

“Making bitcoin a significant part of your portfolio would increase your risk substantially,� says Eswar Prasad, a trade-policy professor at Cornell University who is writing a book about digital currencies. “But a marginal amount seems worthwhile given recent dynamics.�