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Bitcoin: Bull vs. Bear

By Anders Bylund and Rich Duprey – Dec 9, 2021 at 6:13AM

Key Points

  • The first digital currency still holds a unique place in the booming cryptocurrency market.
  • Bitcoin's global acceptance means it will be around long after other cryptocurrencies fail.
  • Betting it all on a single investment is never a good idea. A balanced approach will serve you better in the long run.

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Your portfolio should probably have some exposure to Bitcoin, but it's also important to limit your exposure to any single asset.

The Bitcoin (BTC 1.94%) token has nearly tripled in value over the last 52 weeks, and the three-year chart shows a heart-stopping return of 1,360%. Regulators are taking cryptocurrencies much more seriously than they did during the last rally in 2016, and even traditional banks are working on their digital-currency strategies.

Exactly how bullish should you be on Bitcoin right now? Two Motley Fool contributors agree that it's a valuable digital asset, but one of them wants to remind you that Bitcoin remains a risky bet.

A bull and a bear facing off atop a pile of large, golden coins bearing the Bitcoin logo.

Image source: Getty Images.

The first is still the best

Rich Duprey (Bull): There are more than 8,000 cryptocurrencies on the market today, and more are being created daily, but the granddaddy of them all, Bitcoin, remains atop them all. Shakespeare once noted that heavy is the head that wears the crown. One must always be on the lookout for usurpers to the throne, but it's unlikely any of the thousands of pretenders are an actual threat.

Bitcoin paved the way for a cryptocurrency tsunami and has become the standard by which all others are measured. With a near trillion-dollar valuation at the time of this writing, Bitcoin is the most valuable cryptocurrency and accepted as a viable alternative to a cash-based society, unlike almost every other coin. And it's accepted by more merchants globally than any of its rivals.

Over 7,600 merchants accept Bitcoin, whereas the second-most valuable cryptocurrency, Ethereum, is accepted at just 3,900 merchants. In comparison, despite its wild popularity this year, Shiba Inu has a sparse collection of just 374 merchants.

That universality is tough to compete against, which means that even though other digital currencies may become commonplace, they won't supplant Bitcoin. There's also growing institutional interest in and support of Bitcoin, along with widespread availability of wallets, exchanges, payment services, gaming platforms, and more that accept or are denominated in Bitcoin. What was once a disruptive asset has since become mainstream.

Like other hard assets such as gold and silver, Bitcoin's built-in scarcity means its value will rise over time as demand for it increases, even if there are wild price swings in the short term. And it's that volatility that provides investors with their greatest opportunity.

We're in the midst of a period of runaway inflation, which isn't likely to abate anytime soon. Trillion-dollar government spending programs, a compliant Federal Reserve pumping trillions more into the economy, and historically low lending rates are conspiring to spike prices. Because Bitcoin can't be devalued like government money, it's a hedge against inflation.

Yes, Bitcoin is pricey now, but it's going to get pricier still. Today's value will look quaint to an investor in the future contemplating the heights the cryptocurrency will reach.

Don't go too crazy on Bitcoin, dear investor

Anders Bylund (Bear): I'm not here to tell you that Bitcoin is a terrible investment. It's true that this cryptocurrency giant holds a massive first-mover advantage that will keep it relevant for years to come. I'm just asking you to take it easy on this one.

Despite Bitcoin's unique market position, there are real risks involved in owning this digital asset. If you're tempted to bet the farm, your entire retirement account, and a second mortgage on Bitcoin tokens, I would urge you to reconsider that idea.

There are a few companies that have effectively gone all-in on Bitcoin by converting most or all of their cash reserves into the leading cryptocurrency. Business-intelligence specialist MicroStrategy (MSTR -1.38%) holds 121,000 Bitcoin tokens on its balance sheet, worth more than $6.1 billion at current prices. The company had just $57 million in traditional cash equivalents by the end of its third quarter. MicroStrategy's stock chart is nearly identical to Bitcoin's price chart these days:

MSTR Chart

MSTR data by YCharts.

That's great if Bitcoin really does soar to the moon. MicroStrategy CEO Michael Saylor will look like a genius if and when Bitcoin prices rise from $50,000 to a million dollars. Honestly, I think that's where Bitcoin is going in the long run, and I wish Mr. Saylor the best of luck.

However, there's a greater-than-zero risk that something goes wrong along the way. For example:

  • A significantly better technical solution to the same problems that Bitcoin tackles could disrupt the old disruptor.
  • Heavy-handed government regulations could take the wind out of Bitcoin's sails.
  • The software behind Bitcoin is still technically in the beta-testing stage and could still experience meaningful changes as the code base evolves. Among these potential changes, developers just might decide to ditch the hard cap on the number of total Bitcoins -- losing that vaunted protection against inflation in the process.

Again, chances are very good that none of these risks will come to pass, but I can't categorically say that they're impossible, either. Michael Saylor's all-in bet on Bitcoin would look tremendously misguided if the cryptocurrency hits one or more of these potential snags.

So please be careful out there. I own a small fraction of one Bitcoin, along with several other digital currencies, and all of that adds up to a minority of my total investment portfolio. That's the sensible way to get started in the cryptocurrency market, just like you shouldn't bet your life savings on a single stock or the world's most amazing bottle of Cabernet Sauvignon or the finest batch of tulip bulbs. A diverse portfolio can build your wealth even in the face of a few major setbacks.

How much Bitcoin should you buy today?

After checking out the promising pros and potential cons of owning Bitcoin tokens, you should sit down and have a good, hard think on how your own portfolio fits into the cryptocurrency market. You're the best steward of your own financial future. We're just giving you the tools needed to make an informed decision.

Anders Bylund owns Bitcoin and Ethereum. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns and recommends Bitcoin and Ethereum. The Motley Fool recommends MicroStrategy. The Motley Fool has a disclosure policy.

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