Bitcoin offers cryptocurrency investors the best combination of risk and reward.
If you're looking to put $1,000 to work in the cryptocurrency market right now, you're probably looking for a cryptocurrency with significant growth potential. And, given the current macroeconomic uncertainty, some measure of downside protection is probably also being sought.
Searching for a cryptocurrency investment with upside potential and downside protection may seem a little quixotic, but there is actually one cryptocurrency that offers both. If it is bitcoin (btc -1.41%). If I had $1,000 to invest right now, this would easily be my top cryptocurrency pick.
Bitcoin's bullish potential
Some analysts now predict that bitcoin could reach a price of $100,000 by the end of this year and $150,000 by the end of 2025. Given Bitcoin's current price of $63,000, that means you could potentially double your original $1,000 investment in just 18 months.
And, if you take a longer-term view of Bitcoin, the outlook becomes even more attractive. According to Cathie Wood of Ark Invest, Bitcoin could reach a price of 1.48 million dollars in 2030. And, if all goes as planned, he says, Bitcoin could reach a price of $3.8 million. So we're talking about the potential to earn 25 times or even 50 times your initial investment!
That kind of profitability may seem a little fantastic. But not if you consider Bitcoin's historical track record. For much of the last decade, it has been the best-performing asset in the world and it hasn't even been close.
In the decade from 2011 to 2021, for example, Bitcoin posted annualized returns of 230% per year. The next closest asset class (high-growth technology stocks) posted returns of just 20% annually. Of course, past results are no guarantee of future performance, but there is now strong evidence to suggest that Bitcoin has immense growth potential over a relatively long period of time.
Bitcoin Downside Protection
In terms of downside protection, Bitcoin's biggest strength is that it is an inflation-resistant asset. This is due to the algorithm that carefully controls the rate of creation of new Bitcoin. Every four years, as a result of a reduce by half, the rate of creation of new Bitcoin is halved. This is the reason why Coinbase Global now refers to Bitcoin as โa programmatically disinflationary asset.โ So if your main concern is inflation, then Bitcoin should be an attractive option.
Image source: Getty Images.
At the same time, Bitcoin also has notable scarcity, much like a precious metal. It is not for nothing that many investors refer to Bitcoin as "digital gold." Bitcoin's maximum lifetime supply is capped at 21 million coins, and there are already 19.7 million coins in circulation. As Bitcoin adoption grows around the world, the impact of this scarcity on price will only increase.
And there is one more factor that gives Bitcoin downside protection: it is still largely uncorrelated with other financial assets. Put another way, Bitcoin can zigzag when other financial assets do. Therefore, even if the stock market tanks, there is still a chance that Bitcoin won't. This makes Bitcoin a very useful tool for portfolio diversification.
In fact, due to this historical lack of correlation, A growing number of investors now see Bitcoin as a safe haven That can help them avoid the slings and arrows of outrageous fortune. A big reason for this lack of correlation is that, until recently, Bitcoin was largely ignored by Wall Street and outside the traditional financial system.
The ultimate combination of risk and reward?
Bitcoin, of course, is not without risks. As they say on Wall Street, there is no such thing as a free lunch. And Bitcoin exposes you to tremendous volatility. In a single 24-hour period, Bitcoin can rise or fall by 10% or more. Since Bitcoin is traded 24/7 around the world, you could theoretically go to bed thinking you're a millionaire and wake up the next morning only to discover that a significant portion of your wealth has missing.
This is why it is so important to maintain a long-term perspective when investing in Bitcoin. This will prevent you from worrying about short-term drops in value. In the long term, it is difficult to think of a single financial asset that can outperform Bitcoin.
Yes, Bitcoin may no longer be able to offer the types of spectacular returns it offered to early cryptocurrency investors. But, in my view, it still offers the best combination of risk and reward.
