Bitcoin offers crypto investors the ultimate mix of risk and reward.
If you are looking to put $1,000 to work in the crypto market right now, you're probably looking for a cryptocurrency with significant upside potential. And, given the current macroeconomic uncertainty, you're probably also looking for a certain measure of downside protection.
The quest for a crypto investment with both upside potential and downside protection might sound a bit quixotic, but there's actually one cryptocurrency that offers both. Yes, it's Bitcoin (BTC 0.79%). If I had $1,000 to invest right now, this would easily be my top crypto pick.
Bitcoin's upside potential
Some analysts now predict that Bitcoin could hit a price of $100,000 by the end of this year, and $150,000 by the end of 2025. Given Bitcoin's current price of $63,000, that means you could potentially double your original $1,000 investment within just 18 months.
And, if you are taking an even longer-term view of Bitcoin, the picture becomes even more attractive. According to Cathie Wood of Ark Invest, Bitcoin could hit a price of $1.48 million by 2030. And, if everything goes according to plan, she says, Bitcoin could hit a price of $3.8 million. So we're talking about the potential to gain 25-fold or even 50-fold on your initial investment!
That type of price performance might sound a bit fantastic. But not if you consider Bitcoin's historical track record. For much of the past decade, it has been the best-performing asset in the world, and it hasn't even been close.
In the decade from 2011 to 2021, for example, Bitcoin posted annualized returns of 230% per year. The next closest asset class (high-growth tech stocks) posted returns of just 20% per year. Granted, past results are no guarantee of future performance, but there's now a solid body of evidence to suggest that Bitcoin has immense upside potential over a relatively long period of time.
Bitcoin's downside protection
In terms of downside protection, Bitcoin's greatest strength is that it is an inflation-resistant asset. This is due to the algorithm that carefully controls the rate of new Bitcoin creation. Every four years, as a result of a halving, the rate of new Bitcoin creation gets cut in half. This is why Coinbase Globalnow refers to Bitcoin as "a programmatically disinflationary asset." So if your primary concern is inflation, then Bitcoin should be an enticing option.
Image source: Getty Images.
At the same time, Bitcoin also boasts remarkable scarcity, much like a precious metal. It's for good reason that many investors refer to Bitcoin as "digital gold." The maximum lifetime supply of Bitcoin is capped at 21 million coins, and 19.7 million coins are already in circulation. As Bitcoin adoption grows worldwide, the impact of this scarcity on price will only increase.
And there's one more factor that gives Bitcoin downside protection: It is still largely uncorrelated with other financial assets. Put another way, Bitcoin can zig when other financial assets zag. Thus, even if the stock market tanks, there's still a chance that Bitcoin won't. This makes Bitcoin a very useful tool for portfolio diversification.
In fact, due to this historical lack of correlation, a growing number of investors now view Bitcoin as a safe-haven that can help them avoid the slings and arrows of outrageous fortune. A big reason for this lack of correlation is that, until recently, Bitcoin was largely ignored by Wall Street and stood outside the traditional financial system.
The ultimate mix of risk and reward?
Bitcoin, of course, is certainly not without its risks. As they say on Wall Street, there's no such thing as a free lunch. And Bitcoin exposes you to tremendous volatility. In a single 24-hour period, Bitcoin can rise or fall by 10% or more. Given that Bitcoin trades 24/7 globally, you could theoretically go to bed thinking you're a millionaire and wake up the next morning only to find that a significant portion of your wealth has been wiped out.
That's why it's so important to keep a long-term perspective when investing in Bitcoin. This will keep you from worrying about short-term dips in value. Over the long haul, it's hard to think of a single financial asset that can outperform Bitcoin.
Yes, Bitcoin may no longer be able to deliver the types of spectacular returns that it offered early crypto investors. But, from my perspective, it still offers the ultimate mix of risk and reward.
Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global. The Motley Fool has a disclosure policy.
