Bitcoin is the world’s most popular digital currency. In July of 2010, one Bitcoin sold for 4 cents.
Today, that price is over $400—and rising. Bitcoin’s meteoric rise from fringe topic to digital gold mine was—in the scheme of things—quite swift. Yet there are many who believe that the best is yet to come. Bitcoin is increasingly considered not only as a serious investment, but also as a hedge for a well-diversified investor.
Bitcoin as an Investment
Bitcoin has gained tremendous value in a very little amount of time—but it has also been subject to huge volatility. While those who bought at 4 cents and sold at the high of $1,000 might be millionaires, those who bought at the wrong time are still underwater. With huge price swings, Bitcoin investing has not been for the faint of heart.
What matters for those investing today is the likely value of Bitcoin in the future. The Winklevoss twins—famous for their lawsuit against Facebook, and big investors in Bitcoin themselves—estimate the total value of all Bitcoins will rise from today’s $6.8 billion to around $400 billion. That’s over 50-fold of upside potential.
Estimates like this generally assume Bitcoin will become a popular way to send and receive money, that it will be used as a store of value, or both. Whether Bitcoin will live up to these expectations is uncertain, but if Bitcoin achieves anything near mainstream success, a further appreciation seems likely. Digital payments service Paypal alone is worth over $40 billion, and Bitcoin transactions offer much lower fees.
If Bitcoin is instead valued like gold, as a digital store of value, taking a mere 5% share of gold’s $7 trillion market would suggest a valuation of $350 billion. Whether Bitcoin is valued as a payments system or an asset, evidence suggests there is room to grow.
Bitcoin is Revolutionary
Bitcoin is popular because Bitcoin is revolutionary. Bitcoin is not issued by a government subject to elections and political crises. Instead, it is underpinned by the blockchain, a decentralized ledger of every transaction. This technology is a true breakthrough, enabling nearly instant transactions with virtually no fees.
That’s why Goldman Sachs, JP Morgan, and others have joined a partnership to increase acceptance of the blockchain. Ironically, this development has led some to believe that Bitcoin was too innovative for its own good, and is thus destined to be a mere blueprint for future financial innovation. Others believe that the digital currency—already accepted by Overstock.com, Reddit, Dell, and other businesses, is too popular to go away.
Bitcoin as a Hedge
Some have argued that Bitcoin will act similarly to gold, acting as a safe haven during times of trouble. This is not simply the realm of speculation; Bitcoin has played this role before. During the bailout of Cyprus, when depositors took a haircut on their accounts and many were unable to get cash, the price of Bitcoin skyrocketed, gaining 87%. This was an amazing spike, given that Bitcoin is a worldwide currency, and the Cyprus issue was a localized problem. Should similar issues pop up in a major economy, an even larger spike is possible.
Bitcoin’s uncorrelated nature makes it one of the most interesting investments available today. On the one hand, it is mostly immune to the movements of the stock market, and in fact may offer protection in the case of a crash. Yet Bitcoin is also subject to unique risks of its own.
Unique Risks and Rewards
Bitcoin’s digital nature makes it both safer and more vulnerable than conventional assets. On the one hand, a fortune stored in Bitcoin is immune to fires and break ins, and no criminal on the street will hold you at gunpoint asking to be paid digitally.
At the same time, anyone with an internet connection can potentially hack you, engaging in an untraceable theft. Even large exchanges are not immune. Mt. Gox, once the most popular Bitcoin exchange, closed down amid allegations of fraud, leaving investors out to dry. Moreover, in a true crisis, digital assets will probably be less valuable than cash or gold in hand.
No Pain No Gain
The old adage “no pain, no gain” is appropriate here. While Bitcoin is seen by some as risky, without risk there can be no reward. Bitcoin is an exciting currency at the forefront of a true digital revolution. The fact that it is a unique, uncorrelated asset also makes it attractive as a hedge. Many investors would be well served to consider investing in Bitcoin as part of a properly diversified strategy.