Bitcoin (BTC 1.48%) has soared 57% in 2023 (as of Aug. 23), easily topping the 33% gain generated by the Nasdaq Composite Index. And in the past decade, the top digital asset has skyrocketed an impressive 21,000%.
Even though the world's most valuable cryptocurrency is on an absolute tear and has undoubtedly been one of the best investments in the past 10 years, investors should be mindful of some risks. Only after seeing that context can we answer the question, "Is now the right time to sell Bitcoin?"
Let's take a closer look.
CRYPTO: BTC
Key Data Points
Risky business
Besides being volatile, which might deter some investors from owning a particular asset for the long haul, Bitcoin faces other potential headwinds. The most prominent has to do with potential government actions. The big news a couple of years ago was that China made it illegal to own or mine cryptocurrencies within its borders. What if another major economy, say the U.S., adopted a similar stance? Given the turmoil the industry went through last year, as some notable crypto firms imploded, there's always the chance that regulatory bodies will place strict controls on these assets.
Bitcoin is software, so there's also the possibility that the technology underpinning the network somehow fails in the future. To be fair, I think Bitcoin deserves the benefit of the doubt because it has lasted more than 14 years without being hacked once. But if quantum computers, machines that can process complex calculations incredibly quickly, become more mainstream, then there's the worry that Bitcoin's encryption could be cracked. However, the financial services providers that support the Bitcoin network will likely also get stronger, somewhat mitigating that risk.
There's also the chance that the world simply doesn't adopt Bitcoin in any other capacity than for financial speculation. I'll admit that its future as a medium of exchange is still to be determined. And current financial and payments systems, despite their problems, might be adequate, at least in more developed countries, eliminating the need for a better form of money.
These concerns could result in some investors selling their Bitcoin, especially if there are sizable profits to be had.
Reasons to be bullish
Nonetheless, there are numerous reasons to be bullish on Bitcoin. In the near term, the asset can benefit from a more dovish Federal Reserve. With inflation cooling, perhaps the central bank will start to cut interest rates in the near future, a boon for riskier assets. Based on Bitcoin's price action so far in 2023, investors might already be expecting this to happen.
Another near-term catalyst is the potential introduction of larger pools of institutional capital. The Securities and Exchange Commission has received applications recently from major asset managers, all trying to launch spot Bitcoin exchange-traded funds (ETFs). If approved, these ETFs will make it almost frictionless for investors to gain exposure to Bitcoin from trusted financial-services firms. Higher demand, particularly from investors controlling trillions of dollars, can propel Bitcoin to new heights.
As of this writing, Bitcoin's price is 62% below its all-time high of nearly $69,000 from November 2021. Despite its wild swings in the past, it has always bounced back stronger to eclipse its previous high-water marks. And there's also the halving scheduled for April 2024, which will reduce the rate of Bitcoin's supply growth -- an event that happens roughly every four years. This has usually been bullish for the price of Bitcoin.
Even considering the significant risks that Bitcoin is facing, I still think it's smart for investors to allocate at least a tiny fraction of their overall portfolios to this top digital asset. The upside is so large that it more than makes up for any downside factors.
