In recent weeks, high inflation and rising bond yields have tempered enthusiasm for more speculative assets like cryptocurrency. And the Federal Reserve's plan to hike interest rates three time in 2022 has added fuel to that fire, triggering the most recent crypto crash. In fact, the crypto market is now down about 35% from its all-time high.
Of course, seasoned investors know that volatility is common when dealing with these digital assets. The market has crashed before, and it will almost certainly crash again. That being said, every past downturn has been a buying opportunity, so there is good reason to believe these headwinds are temporary in nature.
For that reason, now looks like a good time to invest, and Bitcoin (BTC 0.20%) is ripe for the picking. It currently trades almost 40% below its all-time high, but the optimism of institutional investors -- a group that's increasingly bullish on Bitcoin -- could translated into 10-fold gains (or more) in the next few years. Here's what you should know.
The principle of supply and demand
With its launch in 2009, Bitcoin became the first modern cryptocurrency. It wowed the world with blockchain technology, a record-keeping system maintained by a decentralized network of miners rather than a centralized institution, like a bank. To that end, Bitcoin acts like electronic cash, allowing people to transact digitally without going through a bank or using a credit card.
That quality certainly played a role in making Bitcoin popular, and there are plenty of people who believe that it could one day serve as a global currency. That said, Bitcoin is much too volatile to replace any fiat currency like the U.S. dollar, and the current market environment is a perfect example of why it wouldn't work. Who wants money that could lose 40% of its value in a matter of weeks?
However, the importance of Bitcoin's popularity shouldn't be overlooked. Despite being the oldest cryptocurrency, it remains the most valuable, with a market cap of almost $800 billion. That implies strong demand, which is particularly noteworthy in light of its limited supply. Specifically, Bitcoin's source code imposes a hard cap of 21 million coins, meaning it's a finite asset. And basic economic principles tell us that when demand outpaces supply, the price of an asset will rise.
Despite the recent market crash, I don't think the current headwinds will damp long-term demand for Bitcoin. In fact, there is a catalyst at work that could significantly boost demand in the coming years.
A recently study from Fidelity indicates that 52% of institutional investors own digital assets, and not surprisingly, Bitcoin is the most popular digital asset among those big money managers. More importantly, the study suggested that 71% of institutional investors plan to diversify into digital assets. In other words, they are becoming increasingly bullish on cryptocurrency.
Another report, this one from Nickel Digital Asset Management, indicates that 62% of institutional investors without current exposure will buy cryptocurrency in the next year, and 82% of institutional investors plan to increase exposure to digital assets by 2023. In all cases, that rising demand for digital assets should be a tailwind for Bitcoin, pushing its price up over time.
As a final thought, Ark Invest Chief Executive Officer Cathie Wood believes institutions will eventually put 5% of their money into cryptocurrencies -- a sizable figure, since institutional investors now have more than $100 trillion in assets under management. To that end, Wood believes the price of Bitcoin will reach $500,000 by 2026, implying a gain of more than 1,000% from its current price. That's why now looks like a good time to buy this cryptocurrency.