It was only in November last year that Bitcoin was hitting new all-time highs and threatening to break US$70,000 per coin. Today, the cryptocurrency is going for just US$30,310 each at the time of writing. That’s a fall of more than 55% in just eight months or so.
For long term bulls, this probably represents yet another buying opportunity before Bitcoin’s inevitable climb to new highs. For bears, it probably proves why no one should have invested in it in the first place.
To be fair, although Bitcoin’s recent falls look awful, anyone who bought the cryptocurrency before the start of 2021 (and still owns it) would still be sitting on some pleasing gains. After all, Bitcoin, even at today’s levels, is up close to 500% from the lows we saw in 2020.
So is this flagship crypto still worth buying today? Well, that’s the $64 billion question.
Is Bitcoin worth considering as part of a diversified investment portfolio?
Several of Bitcoin’s so-called advantages have certainly been eroded in recent months. Investors used to say that Bitcoin was an asset uncorrelated to other assets like shares. Well, that certainly hasn’t been evident over 2022 thus far. The cryptocurrency has fallen in value right alongside many of the global share market’s most volatile growth shares.
Its supposed inflationary hedge properties have also failed to materialise in a year that has been defined by rising inflation. The asset Bitcoin gets compared to the most – gold – has pretty much held its value of 2022, while Bitcoin’s has tanked.
But there are reasons to believe Bitcoin is a valuable asset to hold as part of a diversified investment portfolio. Firstly, its use and legitimacy as an asset is still valid. Companies around the world are still figuring out how to use cryptocurrencies and blockchain technology in new and innovative ways.
Secondly, it remains a scarce asset. There are still only 21 million Bitcoins that can ever be created. Like gold, Bitcoin can’t be ‘printed’ in the way that traditional currencies can. So as long as Bitcoin remains relevant, it should still benefit from this scarcity. This could indeed still give Bitcoin inflation-hedging properties over time, as well as reduce its volatility and correlation to assets like growth shares.
Thirdly, there is still every chance that Bitcoin could be worth far more in the future than it is today. If fund managers (or even central banks) around the world start treating this cryptocurrency as they do gold or other assets outside the share market, demand will steadily rise over time (remember, there will always only be 21 million Bitcoins in existence). This is by no means guaranteed. But in my opinion, it is a distinct possibility.
As such, there are many arguments that can be made that would support an allocation to Bitcoin (or even other cryptocurrencies) as part of a diversified investment portfolio.
I am not suggesting anyone bets the house on this asset. But there are far more irresponsible paths to take in my view than a 2-5% allocation to the world’s favourite cryptocurrency.