It would take you more than a few minutes to find an asset that has produced a better return in the past five years than Bitcoin (BTC +0.10%). During that stretch, the world's most valuable cryptocurrency has soared 1,000%. For comparison's sake, the tech-heavy Nasdaq-100 index climbed 128% in that time.
Bitcoin has been on a fantastic run in the past year and a half in particular. But things are cooling down, as it sits 13% off its peak price (as of the morning of May 5). Investors are probably viewing this as a potential buying opportunity.
If we look out over the next five years, where could Bitcoin be?
A unique asset
I think Bitcoin's key value proposition is that it is a scarce asset. There will only ever be 21 million coins in circulation, with a scheduled inflation rate that hasn't been tampered with yet in Bitcoin's roughly 15-year history. As demand for a fixed asset rises, so does the price.
This is in stark contrast to Bitcoin's main competitor, fiat currencies. Thanks to irresponsible fiscal and monetary policies, especially in the U.S., these currencies are constantly losing their purchasing power. Bitcoin's structure seeks a more controlled solution.
Another factor pushing up Bitcoin's price is the advent of a more robust financial services infrastructure. The latest development in this regard was the approval of spot ETF products in January. So far, these have been wildly successful at driving capital inflows to Bitcoin. Plus, the decision by the Securities and Exchange Commission to approve the ETFs can be viewed as a regulatory stamp of approval.
There are many businesses, ranging from Wall Street banks all the way down to scrappy start-ups, all working on different Bitcoin-related products and services. Therefore, it's easy to believe that this asset will find its way into more portfolios over time.
I'm fairly confident that five years from now, Bitcoin's price can be double what it is today. If history is any indication, though, this might prove to be a very conservative outlook.
CRYPTO: BTC
Key Data Points
Risks to keep in mind
After learning about some of Bitcoin's characteristics, it's hard not to become bullish. This is a special asset worth owning. And I do believe it has significant upside over the long term. However, investors need to also be mindful of any risks.
The top risk factor is that the U.S. government bans Bitcoin within its borders, essentially making it illegal to own or mine the crypto. This would basically leave out a massive pool of capital, resulting in weaker demand for Bitcoin. But as Bitcoin's value continues to rise, and more of the wealthy and political class starts to own it, the possibility of a full-on ban diminishes.
Another risk we can't ignore is more technical in nature. Perhaps an approved upgrade to the Bitcoin blockchain creates a software bug that exposes everyone's private keys, rendering the network worthless. Or progress toward quantum computing allows Bitcoin's cryptography to be cracked, again undermining the network's security.
But to help alleviate these potential threats, it's best to realize that Bitcoin nodes won't approve any updates that they think could wreak havoc. And when it comes to quantum computing, there's a high probability that Bitcoin's developers will create a way to bolster the network's security.
Once you understand these risks, you can set more realistic expectations. While I don't believe Bitcoin's return over the next five years will resemble the past five years, it's definitely worth taking a closer look at this cryptocurrency for your own portfolio. Just remember to maintain a long-term mentality and be prepared for the inevitable ups and downs.
