Unhappy days are here again for Bitcoin (BTC 0.25%) owners. The cryptocurrency's price has plunged roughly 24% after hitting an all-time high earlier this year.
However, challenging times can also present huge opportunities for forward-thinking investors. Could buying Bitcoin right now set you up for life?
CRYPTO: BTC
Key Data Points
History is on your side
Make no mistake about it: History is on your side if you want to make money investing in Bitcoin. An initial purchase of $1,000 of the cryptocurrency five years ago would be worth over $10,000 today. If you bought $1,000 of Bitcoin 10 years ago, you'd have a whopping $273,000 or so now.
Past performance is also highly promising for anyone who bought Bitcoin on significant pullbacks. By the way, the current sell-off is much less scary when you look at the cryptocurrency's historical swings.
Bitcoin Price data by YCharts
As the chart above shows, Bitcoin has fallen by roughly the same amount or more as the current pullback around a dozen times over the last 10 years. In some cases, the decline was much steeper than what we've seen recently. Every time, though, Bitcoin eventually roared back.
Granted, history doesn't always repeat itself. But, as someone once said (although probably not Mark Twain as is often cited), it does often rhyme. I suspect that will be true with Bitcoin's latest drop.
Positive omens
Several positive omens should increase investors' confidence in Bitcoin over the long run. Arguably the biggest of these is the Trump administration's decision to establish a national Bitcoin strategic reserve.
It's important to understand what this move means and what it doesn't mean, though. No, the U.S. government isn't going to begin buying Bitcoin in massive quantities. However, Uncle Sam will hold onto the Bitcoin seized as part of criminal and civil asset forfeitures.
Why is this a positive development for Bitcoin's future? Perhaps most critically, it further legitimizes Bitcoin. A national reserve could also lead to reduced price volatility since the federal government won't sell any of its Bitcoin holdings. This added stability just might spur more investors to buy Bitcoin and more businesses to use the cryptocurrency.
The White House's overall pro-cryptocurrency approach could boost Bitcoin over time as well. President Trump has directed several cabinet members and other government leaders to identify ways "to support the responsible growth and use of digital assets, blockchain technology, and related technologies across all sectors of the economy." An improved regulatory framework for digital assets would likely benefit Bitcoin.
Set for life?
Do a history of strong returns and crypto-friendly government policies automatically mean buying Bitcoin right now can set you up for life? Unfortunately, no.
Like any cryptocurrency, Bitcoin is only worth as much as investors believe it's worth. There's no guarantee that the consensus view of its value will be higher in the future than it is currently.
Even if we assume that Bitcoin will bounce back after the latest sell-off as it eventually has after every sharp decline in the past, buying today might not set you up for life. To accomplish this objective would require a staggering gain. Maybe Bitcoin will deliver such a strong performance, but maybe it won't.
The widespread adoption of Bitcoin and growing government support for the cryptocurrency in the U.S. and elsewhere makes it a safer bet than it's been in the past. However, this increased safety could be associated with lower returns. After all, the potential for greater rewards typically is linked hand-in-hand with greater risk. Reduced risk often translates to reduced prospects of returns.
Still, Bitcoin could be a good investment over the long run as part of a well-diversified portfolio. Even if buying it now doesn't set you up for life by itself, doing so could help you achieve the goal.
