Since peaking at close to $69,000 per token in November 2021, the world's top cryptocurrency, Bitcoin (BTC +1.42%), has cratered 56% (as of June 2) amid investor sentiment quickly shifting away from riskier assets. Long-term skeptics of Bitcoin and cryptocurrencies are having their day in the sun right now. But I think this could be a prime buying opportunity.
Despite its poor recent performance, I think every long-term investor -- those that have a time horizon of more than 10 years -- should allocate 1% of their portfolio to Bitcoin. Here's an important reason why.
CRYPTO: BTC
Key Data Points
Bitcoin is essentially a bet against fiat currency
With soaring inflation happening in the U.S., we don't need to look far to see the negative impact of the Federal Reserve's loose monetary policy ever since the Great Recession more than a decade ago. To be fair, low interest rates and other stimulative measures were necessary to get the country past the subprime mortgage crisis and the depths of the coronavirus pandemic.
However, those moves have resulted in the U.S. government now carrying a gargantuan debt balance of more than $30 trillion, which climbs higher each year. And although the central bank plans to aggressively hike interest rates throughout the rest of the year, I'm a firm believer that these officials won't be able to raise rates too high because it would mean higher interest payments that the government would have to make to service its massive debt burden.
How high can the government's debt balance balloon go? I'm not sure, but I don't think it can keep growing forever.
Image source: Getty Images.
Enter Bitcoin. With its ultimate fixed supply of 21 million coins, the world's most valuable crypto can be viewed as an indirect hedge against the massive money printing that has occurred not only in the U.S., but in other countries as well. The M2 money supply, which includes money held in checking and savings accounts, has risen substantially over time and now totals over $22 trillion. Therefore, basic economic theory tells us that the value of Bitcoin, an absolutely finite asset, relative to U.S. dollars, a perpetually depreciating currency with unlimited supply, should rise.
Now obviously, things don't necessarily move in a straight line. Bitcoin, and cryptocurrencies in general, are notorious for being extremely volatile. But over the past five years, for example, Bitcoin's 1,100% price appreciation speaks for itself. As more individuals and institutions begin viewing Bitcoin as a store of value, without even considering any possible real-world use cases, I think the potential future returns are still sizable from today.
In my opinion, a prudent approach would simply be to allocate 1% of a well-diversified portfolio to Bitcoin. This strategy smartly incorporates the level of risk, volatility, and wide range of potential outcomes associated with Bitcoin. There is, after all, a ton of uncertainty regarding its future, particularly as it relates to the ongoing threat of government regulation.
If investors were to lose 1% of their portfolio's value, they probably wouldn't think too much of it. That small of an allocation allows for peace of mind. At the same time, it immediately gives long-term investors a rare and highly asymmetric risk-reward bet. The upside is absolutely huge, with limited downside.
