Even amid the recent price drawdown, Bitcoin (BTC -0.40%) has been one of the best financial assets to own over the years. Its trailing-five-year return of almost 4,000% crushes the broader S&P 500 by an insanely wide margin.
But not everyone is convinced about the long-term viability of the world's most valuable cryptocurrency. As a result, Bitcoin's naysayers are just as loud as its biggest supporters. This makes it both an exciting and contentious topic to cover, especially now when it seems to be at the top of every investor's mind.
Let's take a closer look at the most promising bull case and the most serious bear case for Bitcoin in 2022. Hopefully it helps bring some clarity to the conversation.
Bull case: Institutional adoption will take off
While Bitcoin's ultimate goal -- to be a global medium of exchange -- is still a long way off, primarily because of its extreme volatility, its legitimacy as a store of value is showing real progress. Not only are retail investors interested in holding Bitcoin, but we're also seeing institutional adoption rise.
It's getting easier to gain exposure to Bitcoin. For example, investment bank Goldman Sachs has a dedicated trading desk for Bitcoin futures. And there are numerous Bitcoin-focused exchange-traded funds on the market today. Coinbase Global, the leading U.S. crypto brokerage and exchange, even has an offering, called Coinbase Prime, specifically catered to the needs of institutions as it relates to asset custody and trading analytics. These significantly reduce friction for those looking to get involved.
The argument for Bitcoin to become a digital version of gold certainly has merit, which will propel the cryptocurrency's status as a store of value. Bitcoin is portable, divisible, and can be transacted, characteristics that gold doesn't possess. Additionally, while gold has relative scarcity (if the price is high enough, more gold can be mined), Bitcoin is absolutely finite (there will be only 21 million coins mined). With the total value of gold in the world estimated to be north of $9 trillion, Bitcoin, whose market cap as of Jan. 28 was $714 billion, has huge upside if institutions view it similarly to the precious metal.
Cathie Wood is one of the most bullish investors when it comes to Bitcoin. According to her, its price could reach at least $500,000 (compared to $38,000 on Jan. 28) if institutional investors, including corporations and even governments, allocate 5% of their portfolios to it. I don't know when, or if, this will happen. But I'm sure that as the world continues to recognize Bitcoin as a serious asset, it would be imprudent not to own at least a little.
Bear case: Governments will ban it
On the other hand, the threat of government intervention is grabbing the crypto industry's attention. Last year, China decided to ban all cryptocurrency mining and usage within the country, sparking fears that the same thing could happen in the U.S. The entire point of Bitcoin is to create a decentralized electronic cash system that takes power out of the hands of governments and gives it back to the people. Unsurprisingly, those in control will push back.
More recently, the International Monetary Fund (IMF), an organization made up of 190 countries whose goal is to promote financial stability, encourage monetary cooperation, and reduce poverty, suggested that El Salvador reverse its decision to accept Bitcoin as legal tender. El Salvador's 2020 gross domestic product of $24.6 billion makes it tiny in terms of its relevance to the global economy, but the IMF's stance shows that it could be concerned about other countries following in the Central American nation's footsteps, which would undermine the IMF's power and influence.
And here in the U.S., the White House is expected to announce an executive order in February that will grant various agencies the power to regulate cryptocurrencies as they see fit. It will definitely provide more clarity about the government's stance on the industry, but just how excessive they will be (or won't be) is a big question mark.
Although the chairmen of the Securities and Exchange Commission and the Federal Reserve have publicly said that they don't intend to ban cryptocurrencies, the uncertainty can be worrying. From the perspective of the U.S., I think an outright ban is highly unlikely, unless the country wants to fall behind when it comes to being an innovative leader in the space. Nonetheless, it's something to keep a close eye on.
One thing is for sure
Undoubtedly, Bitcoin has a massive number of supporters as well as skeptics, making it the most polarizing asset out there. Such is the case with a new technology that has the potential to fundamentally change how we view and interact with money. But one thing can't be denied: We can no longer ignore it. So understanding the bull and bear cases is a necessary and worthwhile exercise.