In the world of equities, most investors know that a first-mover advantage is a big deal. In the world of cryptocurrencies, this also appears to be the case. As the world's first (and for some time only) option for crypto enthusiasts, Bitcoin (BTC 0.15%) has led the way in reshaping how investors think about assets.
The rise of digital tokens and blockchain technologies has shifted the paradigm with respect to how we think about commerce. Indeed, Bitcoin's rise has provided credence to the idea that cryptocurrencies have the potential to transform the world as we know it. Everything from payments and overseas transactions to banking, insurance, and other major institutional functions we take for granted stand to be disrupted.
Or, at least, crypto enthusiasts hope so.
Many investors remain on the fence. After all, the volatility cryptocurrencies have shown is both remarkable and stomach-churning. Additionally, crypto theft, otherwise nefarious uses for cryptocurrencies, and the pesky question of just how to fundamentally value these digital tokens remain a pain in the side of investors who just don't know where to start.
Let's dive into three reasons why Bitcoin continues to be a core holding of many top crypto investors today.
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Broad Investor Base Provides Stability
It's certainly difficult to make the argument that any cryptocurrency is "stable." That is to say – volatility is an accepted reality in the crypto world. Bitcoin is certainly no different than its peers in this regard.
However, the broad investor base Bitcoin enjoys does provide investors with benefits. This is perhaps the easiest cryptocurrency to trade or find on any given exchange. Indeed, Bitcoin is generally viewed as the "gold standard" among many investors – we'll get to that in a minute. The simple fact that most cryptocurrencies are priced not only in U.S. dollars, but also in BTC, reflects this concept well.
This broad investor base has begun to include large institutional investors and some big "mainstream" money of late. Generally speaking, large institutional investors don't tend to flip their investments in the same way day-trading retail traders do. The idea that Bitcoin, perceived as the king of cryptocurrencies, could one day stabilize with a large enough base of investors, is an intriguing one for those considering cryptocurrencies to ponder.
Potential Hedging Benefits
For investors who haven't noticed, stocks aren't cheap. Indeed, by some metrics, equities are currently trading at valuations that (historically speaking) have never been seen before.
The famous "Warren Buffett Indicator" tells us so. The total market capitalization of the U.S. stock market is now more than double that of U.S. GDP. During previous bubbles (including the dot-com bubble), this metric approached 150%. Accordingly, many economists and value investors have reason to balk at this extremely high-level today.
But where to put one's money?
Bond yields continue to remain near historic lows. And with inflation running well in excess of bond yields, a negative real return for many investors isn't enticing.
Accordingly, other alternative investments have become increasingly appealing. There's real estate (which does provide decent yields, but with significant transaction costs and headaches), gold, and of course cryptocurrencies.
The returns Bitcoin has provided since its inception relative to the stock market are eye-watering. Accordingly, the temptation to chase these returns has driven capital flows into Bitcoin in a big way.
Bitcoin Viewed As a Store of Value
Indeed, the idea of Bitcoin as a market/inflation hedge is intriguing. Capital flows matter to the cryptocurrency sector. And given Bitcoin's status as the largest cryptocurrency by market cap, the argument that excess money-seeking returns outside of the stock market would find their way into Bitcoin specifically relies on the idea that Bitcoin is a superior store of value.
Like gold, investors are hopeful that by buying something that may not have a lot of utility outside of specific use cases (gold and crypto are similar in this way), the appreciating price of said store of value will stabilize one's returns in a bear market.
In other words, like buying a few gold coins and burying them in one's backyard, it's a way for folks to put money away for a rainy day. When the time comes to dig up that chest or take that Bitcoin out of cold storage, the hope is that it will be worth more down the road than when said investor made the purchase.
Last word
Bitcoin certainly comes with its fair share of risks. Cryptocurrencies in general are highly volatile assets holding questionable intrinsic values. Accordingly, for those looking to put a portion of one's investment portfolio into Bitcoin (or any cryptocurrency for that matter), it's important to do so in a way that is concurrent with a given investor's risk tolerance level. Sizing such positions properly and constructing one's portfolio in a way that allows an investor to sleep well at night is important.
However, Bitcoin remains the gold standard in the cryptocurrency world for investors considering this space. It's become synonymous with the sector itself and is the number one choice for many crypto investors for a reason. Accordingly, those looking to dive into crypto at this stage in the game certainly have reason to stick with the leader in this space.
