Last year, Bitcoin (BTC 2.60%) hit record values as it breached the $100,000 mark and continued to climb higher. Cryptocurrencies can be extremely volatile, but for many enthusiasts, it was a sign of the growing acceptance of Bitcoin and digital assets as a whole. Many analysts and investors see a lot more upside for the digital currency. Ark Invest's Cathie Wood, for instance, sees the cryptocurrency potentially soaring as high as $1.5 million by 2030.
But not everyone is convinced that crypto is the real deal. Billionaire investor Warren Buffett has previously said that Bitcoin and cryptocurrencies in general "will come to a bad ending." While it's been years since he made that prediction and it looks to be incorrect right now, it's still a possibility to consider when looking at the long term.
Which investor is likely to be right about Bitcoin: Cathie Wood or Warren Buffett? Below, I'll make the case for a bullish and bearish position on crypto, and explain which scenario I think is more likely to play out for Bitcoin in the long run.
The case for Bitcoin rising to $1.5 million
Bitcoin has generated terrific returns for investors during the past five years, rising by around 1,000%. The digital currency has been gaining ground with investors as a way to store value and diversify.
Bullish investors see crypto as a new type of asset class and believe that as more companies and individual investors add crypto to their portfolios, that can help drive Bitcoin's valuation even higher. Even if investors allocate a small percentage of the money in their portfolio to crypto, that can lead to a surge in demand, pushing the value of the digital currency significantly higher in the future.
The launch of many spot Bitcoin exchange-traded funds last year made it easier than ever for investors to also gain exposure to Bitcoin, without having to worry about setting up a digital wallet or using a crypto trading platform. As there are more ways to invest in crypto, it will help encourage more investors to add it to their portfolios, and thus, result in a rising valuation for Bitcoin.
The incoming Trump administration may also put into place more crypto-friendly policies and even set up a federal reserve of Bitcoin, which may result in other governments following suit. Such moves may also entice more of the general public to invest in Bitcoin.
The case for another Bitcoin crash
For Bitcoin to come to a "bad ending" wouldn't necessarily have to mean that the cryptocurrency will fall to zero. But it would definitely suggest that a big crash may be in the cards, similar to the dot-com crash, which occurred in the early 2000s.
The reason it could happen is that cryptocurrencies are incredibly volatile and speculative investments. While Bitcoin has soared in recent years, a lot of that has to do with the growing popularity of meme stocks and high-risk investments. Many retail investors have been willing to bet on risky plays in the hopes of winning big or simply proving short-sellers wrong. One example is car rental company Hertz, which filed for bankruptcy in 2020. Retail investors piled money into the stock, sending it soaring. It has emerged from bankruptcy but remains a highly risky investment today.
A lot depends on retail investors and how willing they are to keep putting money into a high-risk investment such as Bitcoin, which has limited use cases and doesn't truly solve a problem for the economy. It rises in value for speculative reasons; many investors simply buy it because they believe it will increase in value, which is what the greater fool theory is all about. And that's a dangerous way to look at any investment.
There is a high degree of risk that the excitement surrounding Bitcoin could wane and retail investors pull their money out of the speculative investment in the future, potentially to follow the next big thing. And should that happen, a big crash, or a "bad ending" could follow.
Which scenario is more likely?
The scenario I think is more likely to play out over the next five years is that a big crypto crash will come. It may not spell the end of the digital asset, but it looks like a more probable scenario than assuming the digital currency will generate 10-fold or 15-fold returns from here on out.
The excitement is high around crypto these days but you can say the same about many other types of high-risk investments in tech and artificial intelligence. Hype alone isn't going to continue to drive valuations higher forever and sooner or later a correction could take place. The same can be true about Bitcoin. It's a highly risky and speculative investment and as investors become more concerned about the economy or there's some unfavorable crypto-related news, a sell-off could ensue.
Investors should tread carefully as Bitcoin is not a suitable investment for the majority of portfolios. There are many solid growth stocks to consider instead, which come with much less risk and that can still generate fantastic returns for investors in the long run.
