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Is Bitcoin a Good Long-Term Investment, or Simply a Momentum Play?

Bitcoin has been one of the best investments over the last five years, but is bitcoin a good long-term investment? Let’s examine.

Most readers are likely familiar with our coverage of stocks, options, and ETFs here at Cabot Wealth Network. But given the significant developments in the cryptocurrency space, it’s worth asking, is bitcoin a good long term investment?

On October 7 of 2020, bitcoin prices were $10,923. A year later, bitcoin was trading at all-time highs near $62,000 before falling by 70% from November highs and 58% YTD. Prior to a fourth-quarter 2020 boom, bitcoin had been stuck in the mud for years after peaking above $19,000 in December 2017. Many investors had given up on it as a hedge against stock prices, the dollar, and other currencies.

Over the long term, the bitcoin trend is undoubtedly up. But as it was in December 2017, the cryptocurrency is undeniably volatile, and its peaks tend to be followed by sharp declines. So that begs the question: is bitcoin a good long-term investment? Or is it only useful as a short-term momentum play in brief, exhilarating bursts?

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Bitcoin vs. the Stock Market

The chart says it’s both. Here is a five-year chart showing the price movement in bitcoin since April 2017 versus the return in the S&P 500:

The relative performance of Bitcoin and the S&P can help us determine if bitcoin is a good long-term investment.

That’s a 680% run-up in bitcoin, and a mere 58% return in the S&P 500 over the last five years.

But look closer at that chart. There have been three big rallies in bitcoin in that five-year period: in 2017, when it raced from about $600 per bitcoin to better than $19,000 by year end. In the first half of 2019, when it zoomed from just under $4,000 at the start of the year to over $12,000 by the end of June. And then in the end of 2020.

All other times, bitcoin has been either stagnant or plummeting.

Consider: after the $19,000-plus top in December 2017, when all your friends who don’t normally talk about investing were asking you about bitcoin, the cryptocurrency completely crashed, losing 83% of its value in the ensuing year.

Following the rally in the first half of 2019, bitcoin prices again collapsed, dipping back to $5,000 by March of 2020 after nine straight months of losses. Then, like stocks in the wake of the February-March market crash, bitcoin rallied again, but really took off in the last three months of 2020, more than doubling its December 2017 by year’s end.

If you had the foresight to invest in bitcoin five years ago, you’d have made a ton of money today. But most people weren’t buying bitcoin in 2017. Chances are, if you did buy bitcoin, you first did so in late 2017, when the noise surrounding it was at a fever pitch. If you did that, you likely either lost money, or (hopefully) sold off and booked a modest profit when cryptocurrencies were in freefall in early 2018.

The same thing would have happened if you bought on the rally in mid-2019. And if bitcoin was your first investment to start 2021, you had a few opportunities to profit in the year but are sitting on a loss if you held into 2022.

But is Bitcoin a Good Long-Term Investment?

Perhaps this time the cryptocurrency will enter a period of sustained growth if the price has well and truly bottomed. The problem is there’s no way of knowing for sure. Bitcoin has so little history as an asset, and what little history it does have suggests that when the price goes south, it reaaallly goes south.

Bitcoin will likely set new highs in the future. We just don’t know if that will be tomorrow, a few weeks from now, or another year from now. I’m not dismissing bitcoin’s utility in today’s digital world. It clearly has a place as the global financial system becomes increasingly digital and interconnected. It’s not going away.

As the last five years have shown, bitcoin can be a very good long-term investment. But you have to get it at just the right time (i.e. not when everyone is talking about it), and you have to be willing to stomach some major ups and downs along the way.

Most crypto enthusiasts these days see bitcoin as more of a commodity due to low transaction speeds and price volatility, but other cryptocurrencies are increasingly using it as a backstop of their own value, making it more akin to digital gold than a true currency.

More compelling crypto investments can be found in tokens that are either purpose-built to avoid those transaction speed throttles or that are laying the tracks for a growing digital ecosystem.

Cabot SX Crypto Advisor is highlighting those opportunities through investments in crypto and traditional tech companies that will be instrumental in growing Web 3.0.

To learn more about those investments, and crypto in general, click here.

Have you invested in bitcoin or any other cryptocurrencies? What was your experience?

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*This post has been updated from a previously published version.

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.