Perhaps the most important market development over the past few years has been the rise in popularity of cryptocurrency. This new asset class, now consisting of tens of thousands of different tokens, has made some lucky early backers wealthy. But it has undoubtedly caused some speculators to lose money as well. 

The world's most valuable cryptocurrency, Bitcoin (BTC 2.99%), has shined and been one of the best-performing mainstream financial assets over the past several years. And even a small dollar amount in the top crypto could've been life-changing for investors. 

Bitcoin has produced a monster return 

Since May 1, 2013, the S&P 500 has produced a total return of 187%. That's not too shabby, but it doesn't hold a candle to Bitcoin, which has seen its price skyrocket from $145 per coin to more than $20,000 today. That monster performance equates to a gargantuan return of 13,900% (as of this writing). And this means that a $1,000 investment in Bitcoin back then would be worth a whopping $140,000 today.  

You'd be hard-pressed to find a more lucrative investment during the same time period. Some of the most well-known growth tech stocks don't even come close. E-commerce and cloud-computing juggernaut Amazon and streaming-service provider Netflix have posted returns of 876% and 692%, respectively, since May 2013. That's not even in the same ballpark as Bitcoin. 

Up to this point, Bitcoin has been used as a tool for financial speculation, a general characterization that can be made for all cryptocurrencies. But besides the bull case arguing that it will continue on its path to becoming a legitimate store of value, like a digital gold, Bitcoin's most ambitious goal is to become a global currency. 

At first glance, this might seem like an impossible task, given that it would undermine the power that governments and their central banks have over the money supply within their borders. However, consider the enormous quantitative easing that happened in the U.S. since the Great Recession and during the coronavirus pandemic. The U.S. is now experiencing the highest inflation in four decades. And this doesn't even take into account what citizens in developing economies are seeing, in some instances corrupt regimes and hyperinflation. Within this framework, Bitcoin's adoption as a medium of exchange makes sense. 

Should investors buy Bitcoin? 

Unsurprisingly, an investor, whether retail or institutional, is often first exposed to cryptocurrencies by buying Bitcoin. Bitcoin is the oldest and most developed digital asset, not to mention the most liquid and most valuable. This situation has resulted in there being a ton of supporting financial infrastructure being built around Bitcoin, making it incredibly easy to buy. 

For example, Block's Cash App, PayPal Holdings, and Robinhood Markets all let users seamlessly purchase, hold, and sell Bitcoin. Coinbase Global, the leading U.S. crypto brokerage and exchange, also gives institutions these capabilities. And you can't ignore the growing number of Bitcoin-focused exchange-traded funds on the market today. 

Before buying Bitcoin, investors need to get comfortable with the extreme volatility. In the past five years, Bitcoin's price has experienced a decline of at least 50% on three separate occasions. This includes the 71% fall (as of this writing) after it reached an all-time high price of nearly $69,000 per coin last November. This up-and-down activity can't be avoided. 

Furthermore, because of the unknown regulatory future and still nascent adoption level, I think the right strategy for long-term investors is to allocate only a small amount of a well-diversified portfolio, less than 5%, to Bitcoin. If Bitcoin can match its past and generate major outperformance, then this will certainly move the needle for the overall portfolio. But if it doesn't, investors should be able to handle a price drop because the allocation is small and manageable.