Holders of Bitcoin (BTC +1.68%) have been on a wild ride over the last few months. From the high it touched in mid-April, its price has fallen by more than 45%, erasing $500 billion in market value. But with that plunge in the rear-view mirror, many people are now asking the question: Is this a good time to buy Bitcoin?
Before making any hasty decisions on that front, investors should consider the pros and cons of owning this cryptocurrency.
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The bull case for Bitcoin
Bitcoin is an electronic cash system powered by blockchain, a type of distributed database that could revolutionize the financial industry. Specifically, blockchain eliminates the need for traditional financial institutions (e.g. banks) to keep the records or facilitate transactions. Instead, it relies on a distributed network of computers that manage transactions, mint new tokens, and maintain the ledgers that make Bitcoin secure. Ultimately, this means that transaction fees are sharply reduced and cross-border transactions are accelerated, creating a more efficient financial system. These are major selling points for Bitcoin and other cryptocurrencies.
Moreover, Bitcoin has achieved greater mindshare than any other cryptocurrency. It became the first widely adopted digital token after its launch in 2009, and remains the most popular cryptocurrency in terms of active addresses, and the largest crypto in terms of market value. In addition, Bitcoin has also seen a flurry of mainstream adoption in the past few years as fintech firms like PayPal, Square, and MercadoLibre have integrated it into their platforms.
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However, the most compelling case for Bitcoin centers on its scarcity. Specifically, the computer code that underlies it caps the total number of tokens that can ever be mined to 21 million. Once that limit is reached -- which is expected to occur sometime around the year 2140 -- it will be impossible to create more Bitcoin tokens. This makes Bitcoin a sort of digital equivalent to gold or silver, in the sense that both derive much of their value from their rarity.
As a final thought, Ark Invest CEO Cathie Wood recently expressed her belief that the value of a Bitcoin token will eventually rise to $500,000 -- roughly 14 times its current price. Given Wood's reputation as one of Wall Street's current hot stock pickers, investors may want to pay attention to her opinions.
The bear case against Bitcoin
One of the most compelling arguments against buying Bitcoin is its volatility. The token price has been as high as $64,800 and as low as $9,100 during the past 52 weeks. Moreover, it recently lost half of its value in just two months, and wild fluctuations like this are nothing new for the cryptocurrency. For instance, investors saw Bitcoin's price plunge 80% in 2018, from $17,500 in January to $3,200 by December. That type of volatility makes Bitcoin a very risky investment.
Bitcoin naysayers also cite its extremely energy-intensive mining process as a headwind to its mainstream adoption. Indeed, research from Cambridge University calculates that the amount of energy consumed annually in mining Bitcoin is 67 terawatt-hours (TWh). That's roughly 0.27% of all electricity produced worldwide in a year, and more than is used to power the entire country of Austria.
Finally, Bitcoin is far from the only blockchain-powered cryptocurrency that could disrupt the traditional financial system. Thousands of others exist, and many -- like Ethereum and Polkadot -- have more utility than Bitcoin, as they incorporate smart contracts and decentralized financial applications.
The verdict
There are good arguments on both sides of this debate -- but personally, I'm inclined to agree with Wood. I wouldn't be so bold as to put a $500,000 price target on Bitcoin, but I do believe it represents a unique asset.
As the original and most popular cryptocurrency, it has an edge over other digital tokens. And by eliminating the need for central oversight by governments and financial institutions, it differentiates itself from fiat currencies. Over time, I believe those unique aspects will drive demand for Bitcoin. And given its finite supply, increasing demand should drive Bitcoin's price higher.
