A look at a price chart over the past decade would easily show that Bitcoin (BTC -2.05%) is, without a doubt, one of the best financial assets to have owned. It has skyrocketed from about $123 in August 2013 to just over $26,000 today. That's a ridiculous gain of more than 21,000% compared to the 283% rise of the Nasdaq Composite Index.
However, the ride up hasn't been smooth, as it's been full of volatility. As of this writing, Bitcoin is currently 61% off its peak price. This might prompt some to eye this big discount to its all-time high as a potential buying opportunity.
To gain a better perspective of the situation, let's examine the bull and bear cases for the world's most valuable cryptocurrency.
Massive upside
In the past three months, major asset management firms, like BlackRock, Fidelity, and WisdomTree, have filed applications with the Securities and Exchange Commission to launch spot Bitcoin exchange-traded funds (ETFs), which haven't yet been available in the U.S. These large investment companies manage trillions of dollars on behalf of global client bases. And their involvement with Bitcoin might provide a stamp of approval for the crypto, which could introduce a massive inflow of fresh capital. That might provide the tailwind Bitcoin needs to reach new highs.
Another reason to be optimistic about this top digital asset is that there's a lot of upside potential should more people learn about and try to understand Bitcoin. It might appear overly complex, but Bitcoin's entire objective is to fix the issues that come about with government-controlled money, known as fiat currency. Some countries deal with hyperinflation, while almost all nations undergo ongoing money-printing measures to help deal with the huge and growing amounts of outstanding debt. In the U.S., this reality doesn't even include underfunded entitlements like Social Security and Medicare.
This financial mismanagement by those in charge can't go on forever. Once people come to this conclusion, they'll naturally be drawn to owning Bitcoin. Its decentralization and fixed supply cap are the exact opposite traits of government money.
This leads to the next point, which is that the central bank can't keep raising rates forever, nor can it keep them this high for long. Interest payments will continue to make up a higher part of the government's budget. Consequently, the possibility that interest rates will eventually decline again can be a boon for riskier assets like Bitcoin.
The risks are clear
If the U.S., the world's economic superpower, were to make it illegal to mine or own Bitcoin within its borders, then it would definitely deal a blow to the crypto. This would be possible by shutting down the major brokerages and exchanges, like Coinbase or Robinhood, and seriously restricting their activities. By limiting access to Bitcoin, its price could be under pressure as demand is weakened.
At a high level, Bitcoin is just software. And as is the case with lines of computer code, there's the chance that a bug is eventually revealed. That's always a possibility, albeit a small one.
If the software revealed issues, it could undermine the Bitcoin network's security, which is its key feature. To its credit, Bitcoin hasn't been hacked in its more than 14 years of existence. But if something happened that caused everyone's private keys to be easily accessed, akin to bank accounts and passwords being exposed, then Bitcoin's price would crash as trust vanishes.
Another clear risk that might be overlooked is that interest in owning Bitcoin simply disappears. This could happen for several reasons, including the possibility that gold becomes even more attractive as a store of value, particularly for the younger and digitally native demographic. Interest could also wane if government money printing ceases to exist, as there would be less of a reason to find a solution to the current monetary system. In this scenario, Bitcoin would probably fall out of favor, and its price would decline.
A compelling asset to own
Bitcoin's risks are important factors to keep in mind, especially when trying to gain a thorough understanding of this top digital asset. After all, there is still so much uncertainty going forward, with its ultimate outcome still a topic of huge debate.
Nonetheless, I believe that Bitcoin's bullish arguments outweigh the potential downside, a point of view that only strengthens with each passing year. I think investors who took the time to learn more would come to the same conclusion.
