"It is digital gold," says Overstock CEO Patrick Byrne, whose online retailer was one of the first to accept Bitcoin payments. Gold bugs might cringe at that remark for a couple of reasons. First, gold hasn't skyrocketed like Bitcoin. Second, the yellow metal’s moves can be measured in pennies or dollars. With Bitcoin, we’re talking thousands of dollars.
On the other hand, the value of Bitcoin is certainly volatile and fluctuates wildly. It’s certainly not an investment for the faint of heart. However, now might not be the right time to bail out on the cryptocurrency. Let’s look at why.
The Bitcoin Rollercoaster
Bitcoin today is worth about $7,800. As recently as September, it was valued at $5,000. Suddenly, within a matter of days (thanks to a Chinese government crackdown on cryptocurrencies), it plummeted 40% to $3,000. However, the decline which brought naysayers out of the woodwork was short lived. By early November, one Bitcoin was worth almost $8,000. Due to some intervention, it dropped about 25% in value shortly thereafter, before recovering to the current $7,800 valuation.
In fact, Bitcoin has seen three major "bubbles” in its seven-year existence. Each time it has picked itself off the mat to achieve new highs. As expected, there's talk of another Bitcoin bubble nowadays. If history is any teacher, the lesson du jour would be not to bet on a bubble. It's time to acknowledge that Bitcoin isn't only a bubble and to take it seriously as an investment that has a place -albeit small - in a comprehensive investment portfolio.
To be sure, Bitcoin as an acceptable investment portfolio option has its detractors; some for the obvious reason that they don’t own it. Those trashing Bitcoin may be jealous due to missing out its meteoric rise. Some of those may have backed the wrong horse and owned gold over the past seven years. Gold has seen no real appreciation over that time.
One of these prophets of doom is JP Morgan Chase's CEO, who called the cryptocurrency a “fraud” back in September, thus missing out on a nearly 60% appreciation. His pessimism has been echoed abroad. Saudi Prince Alwaleed observes,
"I think it's just going to implode one day. I think this is Enron in the making."
However, even if Bitcoin’s bubble were to burst yet again, or “implode” as the prince suggests, there would still be an abundance of happy Bitcoin devotees who were prescient from its inception seven years ago.
Remember, some savvy speculators bought the cryptocurrency for under $10 - in fact, as low as $2! Think of it. Even if Bitcoin tumbled 90% or more, they would still have made a hefty profit. Tons more than if they had owned a precious metal and even more than if they owned Apple or Amazon stock!
By the way, I’m not suggesting the two investment categories are equivalent, given the volatility and risk. Nor would I urge you to mortgage your home to buy Bitcoin. I’m merely trying to provide context. A severe decline is always around the corner but, because of the value of its underlying technology - blockchain - it isn’t going to zero. In fact, it’s more likely that Bitcoin hasn’t yet seen its best days.
Consider a scenario in which blockchain becomes the go-to technology for things such as international bank transfers. Some investment banks, including the aforementioned JP Morgan, have been enamored of that possibility, as well as other possibilities for streamlining financial transactions. Not only financial applications abound. The blockchain technology could even help assimilate migrants in a fashion that is safer and less chaotic.
If things break right for Bitcoin, it's not just in a bubble right now but instead in a period which might be considered prime-time for investors.
Of course, buying Bitcoin isn't like buying a stock or bond. After all, they (unlike Bitcoin), have been around for centuries. Instead, one must “invest” in prudent amounts in the underlying technology’s potential and the whole concept of Bitcoin. When I think of Bitcoin and the doomsayers, I can’t help wondering what their take on the internet was back in the 1990s.
In this vein, I chuckle now when I review the comments made two decades ago by Noble Prize-winning economist (and current columnist for the New York Times), Paul Krugman. He famously opined at the time regarding the internet,
"By 2005 or so, it will become clear that the internet’s impact on the economy has been no greater than the fax machine.”
Indeed. Still, at least Krugman's influence was limited - he only went on to advise presidents of the world’s largest economy on economic policy.
Nothing in this article is intended as investment advice and it should not be taken as such. Opinions are the writer's own.