It's 10:05 a.m. EST on Sep. 3 and Bitcoin's (BTC +0.15%) price is hovering right around $50,000. The leading crypto asset has staged an epic comeback to the upside after languishing below $40,000, and even briefly below $30,000, throughout the summer.
Volatility is par for the course when it comes to cryptocurrencies. However, it's still helpful to make a game plan for when crypto prices move rapidly in either direction. Since Bitcoin is currently on an uptrend, it's a perfect time to ask yourself if it is worth buying -- even at a higher price tag.
Image source: Getty Images.
Why Bitcoin has been a great investment
Bitcoin has faced its share of criticism from reputable investors who see it as a scheme to make money. It's common to attribute Bitcoin's success solely to speculation. Even Charlie Munger, Warren Buffett's right-hand man, has been vocal about his disdain for investing in Bitcoin. Putting your hard-earned savings in contrarian asset classes is difficult when investors you admire say it's a bad idea.
It goes without saying that greed and speculation have played a large role in Bitcoin's ascension. But saying they are the only reasons behind Bitcoin's rise is a bit of a cop-out.
Amazon has been a great stock because it redefined e-commence and leads one of the largest cloud computing platforms. Netflix spearheaded a paradigm shift in home entertainment. Yes, people ultimately bought these stocks because they thought they could make money off them. But the real reason Amazon stock and Netflix stock have done well is that the companies themselves have grown in influence and value. Bitcoin doesn't have a management team or quarterly financials. But it does have core attributes that give it inherent worth.
Cathie Wood, CEO of Ark Invest and a big supporter of Bitcoin, believes that Bitcoin can grow in value over time for the simple reason that more and more companies will carry it on their balance sheets as both an investment and as a hedge against inflation. Bitcoin's underlying value stems from its security, track record of fending off cyberattacks, global transferability, and independence from fiat currency. A capped supply of 21 million tokens, over 90% of which are already in circulation, means that the added supply from mining will soon become negligible. Companies, especially those headquartered in countries with unstable fiat currencies of their own or difficulty accessing U.S. dollars, are finding value in Bitcoin due to its inherent scarcity. Compound this viewpoint on a global scale, and we could see strong underlying demand for Bitcoin from companies around the world for a very long time.
Valuation
No one can tell you what Bitcoin is worth now or what it could be worth in the future. Valuing Bitcoin is far more abstract than the already difficult task that analysts embark on when setting price targets on a stock.
A simpler way to think about Bitcoin, and other crypto assets like Ethereum (ETH +0.71%), is to ask yourself if the story is played out. If Bitcoin were a baseball game, what inning are we in? Is there more room to run? Or is the market saturated and it's all downhill from here?
Even a surface-level glance at the crypto market would tell you that it's still fairly rough around the edges. A lot of the reasons for Bitcoin's price appreciation over the last few years have to do with the asset class becoming more sophisticated in terms of institutional adoption, accessibility, and the potential for regulation. These themes look to be early in their development. However, that's a discussion open to interpretation.
Why buy in the first place?
If an investor thinks that the crypto story is played out, then it's OK to simply avoid the asset class altogether. And since Bitcoin has gone up in price over the last few months, there's even less incentive to buy.
Every investor has a different reason why they would buy in the first place. And if they haven't already, maybe they have a reason why they would prefer to buy sometime in the future. Like any asset, it's much easier to buy something if you understand how it works. Getting a basic understanding of the Bitcoin mining process and a summary of what's been happening over the last few years in the crypto space can provide the essential due diligence needed to invest, or not invest, with confidence.
Regardless of the price, it's best not to think about buying Bitcoin because you think it will go up, but rather, buying Bitcoin if you think its influence will grow. It's tough to answer that question without doing some homework. Even so, there are good arguments on both sides about whether Bitcoin can grow from here. Therefore, before deciding if Bitcoin is worth buying at $50,000, it's best to ask if Bitcoin makes sense for you in the first place.
Bitcoin, Ethereum, and high-yield stablecoins have different characteristics that could be better suited for an investor based on their risk tolerance. So, if Bitcoin isn't a good option, there's a chance a different crypto asset could be a better fit.
The bottom line
Bitcoin's collapse in May and June had little to do with fundamentals, though China's regulatory crackdown on cryptocurrencies did exacerbate the price slide. That said, the ultimate level to which the price fell was nothing but pure speculation. Similarly, the cryptocurrency's rebound over the last month is simply market volatility. Zooming out, not much has changed about the investment thesis in Bitcoin since its initial collapse in May.
Investors interested in Bitcoin could benefit from keeping track of regulatory updates, institutional moves such as PayPal's decision to open crypto trading for its U.K. clients, and other news that adds to the long-term growth story. Ultimately, Bitcoin's success over the next few decades depends on its stickiness in financial markets around the world. If that's something an investor believes in, then there are valid reasons to buy Bitcoin, even at $50,000.
