Bitcoin (BTC -1.22%) is back in the spotlight as it rockets past a previous all-time high of just over $73,800. The granddaddy cryptocurrency is now hovering at about $88,000, as of this writing. The surge reflects a growing optimism, driven, in part, by a new presidential administration that many view as being pro-crypto.
Although the specifics of any policy measures that could help Bitcoin are yet to be seen, comments from President-elect Donald Trump and those close to him, like billionaire Elon Musk, appear to be friendly to digital currency, and Bitcoin specifically.
As we've seen, however, the value of Bitcoin can drop just as fast as it moves up. Given that it's trading as high as ever, is now a good time to invest?
Institutional money has been a game changer
The last few years have been marked by the increasing legitimization of Bitcoin. This is in large part due to the huge influx of capital from institutional investors over that time. And as more institutions invest, Bitcoin is seen as more legitimate, driving new institutions into the market, and so on -- a virtuous cycle.
This year was a sort of inflection point for this cycle, as the Securities and Exchange Commission (SEC), after significant lobbying from the likes of Ark Invest's Cathie Wood and BlackRock chief Larry Fink, approved spot Bitcoin exchange-traded funds (ETFs). These ETFs offer much easier access to Bitcoin for institutional and retail investors alike. They provide liquidity and increase market stability, two critical components of a market for most institutional investors.
Recent research by EY -- one of the Big Four accounting firms -- found that 60% of institutional investors had at least 1% of their portfolio in digital assets. The overwhelming majority of respondents planned to increase their holdings.
This bodes well for Bitcoin. It would seem that at the very least, it has firmly proven that it isn't going to implode and fade into obscurity, as some may have believed in years past. If the trend continues with more firms gaining or expanding exposure, Bitcoin's value is likely to continue to appreciate significantly.
Potential use cases abound
Bitcoin was created as a digital currency, originally intended to be used like cash. Given the cost of Bitcoin transactions, however, it has not found much success as digital cash.
At this point, the prevailing view of Bitcoin that's it's digital gold. Like gold, it is inherently valuable because it is scarce, with a finite supply. Unlike gold, however, it is easily stored, and that is a big advantage. The value of the gold in Fort Knox can be held on a thumb drive. These features make it a great store of value.
Given these traits, Bitcoin could be used by sovereign nations to protect their wealth and back their respective currencies in the same way the U.S. and other nations hold gold reserves. It could be used to strengthen corporate balance sheets, providing the return of an investment with nearly the liquidity of cash. It could be used to send cross-border payments more easily; the list of potential uses goes on.
If any of these use cases gain real traction, it could drive significant price increases.
There are some hurdles, but Bitcoin remains strong
There are some real threats to Bitcoin. It is still in a relatively gray area when it comes to regulation. It's possible that governments begin to regulate Bitcoin in a way that would diminish its value.
The cryptocurrency also faces significant competition from a host of altcoins -- basically all crypt other than Bitcoin -- that many believe provide more utility than Bitcoin. Although this may be true, there is always a trade-off. In this case, more utility may mean sacrifices in areas like security. In my opinion, Bitcoin has cemented itself as the central digital asset and is unlikely to be unseated. There may be room for multiple winners, but I don't see Bitcoin being left off the podium.
Whether now is the right time to invest, as the saying goes, time in the market beats timing the market; there is no way to know where Bitcoin is headed in the short term. Bitcoin's long-term value is what to focus on. Now is as good a time as ever. However, if you are a more risk-averse investor, or perhaps you are nearing retirement, you may want to look for safer, more stable investments.
