Bitcoin (BTC -5.15%) has delivered a staggering return of 27,000% since it launched in 2009. But as with any investment, that return didn't come in a straight line. Bitcoin has hit numerous peaks and dips along the way, and 2021 was a rollercoaster for the coin's trading price.
There are near-term headwinds weighing on its performance, but over the long term, there are good reasons to believe we haven't seen the last high for this popular cryptocurrency.
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Headwinds in 2022
Bitcoin is off 45% from its all-time high of $68,789 that it touched in November. Several factors are contributing to that lackluster performance, including rising interest rates, declining appetite for high-risk assets, and geopolitical tensions.
The recent performance of Bitcoin in response to these uncertainties raises questions about its status as "digital gold," or a hedge against faster inflation. Unlike the U.S. dollar, Bitcoin has a fixed supply, which should support a rising value over time as demand increases. The supply of Bitcoin now stands at about 18.9 million, but the supply is capped at 21 million coins. In theory, that should make Bitcoin a good hedge against inflation, but that hasn't played out.
Bitcoin's recent performance shows an inverse relationship with the increase in long-term Treasury bonds, with yields rising during periods of inflation. As the 10-year U.S. Treasury rate rose in recent months, the price of Bitcoin fell, reflecting a negative correlation between the two.
Fundamental Chart data by YCharts
In turn, Bitcoin shows a high correlation with the performance of the stock market. When a bull market is raging, Bitcoin tends to outperform equities. But during market dips, Bitcoin underperforms.
Bitcoin Price data by YCharts
Bitcoin has a place in a diversified investment portfolio, but its trading history shows that it's highly correlated with market sentiment for high-risk, high-growth assets. Cryptocurrencies are a risky investment, but there is one factor that could send Bitcoin higher over the long term.
Trillions in global wealth
Bitcoin's fixed supply serves as a long-term catalyst for rising prices. Consider that Bitcoin's market value is about $700 billion at the time of this writing, yet the total value of gold owned by investors is estimated at $2.6 trillion. Goldman Sachs believes that more of that money sitting in gold will shift to Bitcoin over time. Because of the coin's fixed supply, a reallocation in those assets could send Bitcoin's price higher. It's a matter of supply and demand.
Other indicators also point to growing interest in Bitcoin. It's the most widely accepted cryptocurrency at merchants worldwide, and wealthy individuals, including sports stars and billionaire investors, are starting to allocate a portion of their net worth to crypto, which means Bitcoin is likely here to stay.
What's more, Boston Consulting Group estimated that global wealth reached $431 trillion in 2020. It would only take a small shift in that amount of wealth toward Bitcoin to lift its price over time. So, yes, Bitcoin can reach $100,000. But given its trading history, that's not likely going to happen until inflation headwinds subside, interest rates stabilize, and another bull market for stocks kicks off.
