In the past 14 years, Bitcoin (BTC +0.37%) has gained significant attention primarily due to an impressive 199,900% increase since 2013. For some context, $1,000 invested in Bitcoin a decade ago when its price was around $13 would be worth nearly $2 million today.
Paving the way for a new era of finance, Bitcoin's harnessing of blockchain technology gave developers and users a blueprint to grow the asset class from just a few dozen cryptocurrencies into the thousands trading today. With plenty of new options for investors, it has become widely assumed that one of the newer, more alluring cryptos holds the potential to eclipse Bitcoin's record-breaking performance of the past decade.
But this notion is flawed for one main reason: There is no "next Bitcoin," and there likely never will be.
Here are three reasons investors should consider simplifying their approach, stop speculating with obscure digital currencies, and sticking to a crypto investing strategy revolving around Bitcoin.
1. Correlation
Bitcoin accounts for almost half of the total value in the cryptocurrency asset class, so its movements often dictate the direction of other cryptos. This is because most of them have a positive correlation with Bitcoin, meaning that when its price rises, so do others, and if it drops, they typically follow suit.
Admittedly, not every digital coin is perfectly correlated with Bitcoin. Furthermore, there are undoubtedly several days when prices of altcoins (cryptocurrencies other than Bitcoin) deviate. Yet, when zooming out, it becomes clear that the bulk of cryptocurrencies usually trade similarly to Bitcoin.
Image source: TradingView
For evidence, take a look at the chart above. The blue line represents some of the top altcoins' combined 30-day correlation to Bitcoin. Following assumptions that values above 0.5 indicate a significant correlation and anything above 0.75 represents a strong correlation, Bitcoin's influence becomes easily quantified and portrayed.
The premise of positive correlation boils down to this: If the majority of cryptocurrencies follow Bitcoin, why not just own Bitcoin?
2. Risky business
Even though most cryptocurrencies correlate to Bitcoin, the harsh reality is that when its price slips, altcoins often fare much worse. This can be difficult to perceive when merely looking at the price charts of altcoins, as investors naturally fixate on their massive appreciation when the crypto market is soaring. However, when bull markets fade to brutal crypto winters, altcoins are hit especially hard.
Clearly, Bitcoin isn't immune to its own pullbacks, at times decreasing more than 70%. But the drawdowns altcoins experience are significantly worse as they have been shown to fall by nearly 90% during crypto winters, effectively erasing all the gains made in previous bull markets.
By chasing these speculative cryptocurrencies, investors take on increasing risk without the benefit of sustained price appreciation.
CRYPTO: BTC
Key Data Points
3. A true cryptocurrency
Arguably, the one aspect differentiating Bitcoin from the rest of the pack is its inherent characteristics that make it a genuinely bona fide cryptocurrency. These traits, namely security, decentralization, and trust, are ingrained into Bitcoin's code and are virtually unchangeable. Moreover, they serve as the fundamental principles that give cryptocurrencies their value and distinguish them from traditional forms of currency.
The simple fact is that no other cryptocurrency comes close to Bitcoin's embodiment of these characteristics. It has a proven track record of securely processing transactions for nearly 14 years without any breaches or hacks, a feat virtually no other cryptocurrency comes close to.
Nor does any other cryptocurrency have high levels of decentralization like Bitcoin, which has grown increasingly decentralized each year and functions without even the remote resemblance of a centralized entity.
Most other cryptocurrencies have a team of developers, venture capitalists, or other figureheads who make important decisions about software updates and monetary policy. Investing in these cryptocurrencies is similar to investing in publicly traded companies, where shareholders essentially place their trust in executives and board members to lead the company in the right direction and generate positive returns for portfolios.
With no CEO, delegated group of developers, or even an identifiable creator, Bitcoin has a complete absence of any centralization, which offers investors maximum trust and confidence that it will continue to operate just as it has for the past 14 years.
Closing thoughts
There is no arguing that investing in only Bitcoin is less exciting than scouring through thousands of other cryptocurrencies in the hope that one will be the next life-changing investment. Yet, this strategy inevitably introduces unnecessary risk with little to no quantifiable upside.
No other cryptocurrency possesses a track record, combination of features, and proven history of returns like Bitcoin. While the rest of the asset class follows its lead, investors are better off sticking with the original and most valuable cryptocurrency.
