Bitcoin (CRYPTO:BTC) has arguably been the top long-term investment of the last decade. Back in 2010, the coin was selling for less than a fraction of a penny. Those who were lucky enough to buy or mine a few and kept it for fun (without losing the wallet password or recovery phrase, of course) would be sitting on seven or eight figure percentage return on investments today. Unfortunately, the millionaire dreams of many new Bitcoin investors went bust in 2021, with the cryptocurrency losing half of its value since its all time-highs of $63,729.50 per coin.

After a painful sell-off in May, Bitcoin is still up a stunning 289% over the last 12 months. The wild price trading action -- which saw the cryptocurrency rallying as high as nearly 600% in April and then plunging 43% from those highs last month -- seems like just another chapter in the book of rampant speculation. It is anything but. A series of complicated geopolitical and financial circumstances were responsible for the coin's record-level volatility. In other words, can investors count on Bitcoin as a safe investment if they armed with adequate knowledge? 

Business owners configuring a Bitcoin mining rig.

Image source: Getty Images.

What is the long-term outlook? 

Contrary to popular belief, Bitcoin is an asset with intrinsic value. This isn't something that is apparent to the average consumer. After all, Bitcoin transactions generate a fee between $6 to $60 (depending on the value of the cryptocurrency), take up to 55 hours for blockchain verification, have a huge degree of volatility, and each transaction consume more than 10 times the energy it takes to process 100,000 credit card transactions. So how could a technology this costly possibly have any value at all -- if not for the pure purpose of buying and selling it to someone else for a higher price?

The answer becomes much clearer when viewed from another lens. Bitcoin has morphed outside the realm of daily transactions. Instead, it is used by high net worth individuals to transfer money internationally while bypassing traditional banking regulations.

Consider the following example: Let's say an individual wishes to transfer $100 million abroad via Bitcoin. Because the cryptocurrency has a limited supply (with a maximum of 21 million coins, out of which 20% being considered lost or irretrievable) spread across over 380 exchanges and 70 million wallets, the investor would have a tough time fulfilling that $100 million Bitcoin buy order. Hence, the investor makes hundreds, if not thousands, of smaller orders -- inevitably creating the perception that there is more buying activity than there is and boosting the price as each incremental order is filled. Because fiat currencies are inflationary, the volume of such lump-sum transfers will only grow over time, theoretically ensuring that the overall trajectory of Bitcoin's price is up as well over the long term.  

Readers may wonder what ultimately is the point of all this, considering that wire transfers are near-universally available and specifically designed to transact large sums of capital. The key detail to pay attention to is "near-universally." In countries like China, the inflow of capital is mostly free, but the central government strictly regulates capital outflow for national defense purposes. In fact, Chinese nationals are only allowed to buy up to $50,000 of foreign currency in any given year and cannot take more than 20,000 Chinese Yuan (RMB) out of China without a special government permit.

In 2020, blockchain research firm ChainAnalysis estimated that $50 billion of cryptocurrency was moved from China-based digital wallets to other world areas. Even if only a small number of coins came from new purchases, that's still pretty significant. Putting it into context, famed mathematician and financier Nasser Nicholas Taleb estimated that every $1 billion of new Bitcoin purchases could spike its market cap by $100 billion before profit-taking drives the price and market cap back down, so that definitely explains much of the buying frenzy we have witnessed so far. 

Three major risk factors

There are three risk factors facing Bitcoin that could quash its long-term outlook. One of the many reasons behind Bitcoin's rise was its ability to solve a niche problem -- allowing wealthy Chinese elites to bypass the country's stringent capital control rules. However, Beijing has recently banned all mining and trading (but not ownership) of the cryptocurrency while barring financial institutions from doing business with cryptocurrency investors. This means that any short-term price action rebound is pretty much off the table.

The second risk factor is increased competition with the cryptocurrency space. There are now over 10,000 cryptocurrencies that could basically accomplish the same task as Bitcoin can and even better. With them all cannibalizing the buying activity, we simply cannot expect the coin to rise as rapidly as before.

The third risk is the controversy surrounding the fungibility of the asset. Believe it or not, Bitcoin is actually less private than cash. This is because every transaction since its inception is publicly available on the blockchain. Firms discussed earlier, like ChainAnalysis, can easily trace transactions to and from blacklisted wallets in tracking illicit activities. 

All of this becomes a problem with increased regulatory activity. Let's say someone purchased 0.3 BTC from a seller on an exchange as a personal investment. However, cryptoanalytic firms later finds that the seller obtained a portion of the bitcoin proceeds from the sale of an illegal firearm three years ago. The cryptocurrency now owned by the buyer is considered "tainted" and he may face questions from law enforcement -- despite being completely oblivious to the source of the funds. Since many illicit transactions has taken place when the coin was trading at double or triple digits, it is a pretty massive problem.

The verdict? 

At the moment, the outlook for bitcoin is pretty bleak. The central government in Beijing has largely blocked out its value proposition in China that played a role in its price appreciation. Meanwhile, the rise of altcoins and other crypto is making Bitcoin more and more archaic. On top of that, the privacy concerns resulting from the coin's previous role in criminal activities will be mounting. For these reasons, I think investors should stay away from Bitcoin for now. The millionaire-making era of Bitcoin is increasingly approaching its finale. But that's not the case for other crytocurrencies

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.