Out of all the cryptocurrencies available today, one stands out from the rest. Aside from being the original and most well-known cryptocurrency, Bitcoin (BTC -0.02%) is also uniquely secure and decentralized, compared to other cryptocurrencies. Here are three other reasons it should be a part of every crypto investor’s portfolio.
Bitcoin is the oldest cryptocurrency
Neil Patel: Launched to the public in January 2009, Bitcoin is the oldest crypto out there. Its introduction as an innovative way two unrelated parties could exchange value with each other with just an internet connection and no central authority between them was revolutionary. Despite the extreme volatility many investors are all too familiar with, Bitcoin has still produced a remarkable return of nearly 700% over the past five years, easily crushing the S&P 500‘s performance during the same time.
It may be the oldest cryptocurrency, but that doesn’t necessarily make it a great investment. Ethereum (ETH 3.07%), the world’s second-oldest and second most valuable crypto, with a market cap of $196 billion as of this writing, built itself on what Bitcoin lacked by introducing smart contracts to the mix.
Smart contracts are software programs that self-execute when two unrelated parties satisfy their requirements of a particular contract. Ethereum promises an unlimited number of decentralized applications, something Bitcoin doesn’t have the capacity for. Consequently, Ethereum might also be a worthwhile investment.
Nonetheless, Bitcoin remains the undisputed leader in the space, representing about 41% of the entire cryptocurrency market (as of Aug. 4). As such, it’s usually the first exposure to the crypto market for both individual and institutional investors. What’s more, Bitcoin’s long operating history has invited the development of a range of financial tools, like Bitcoin-specific exchange-traded funds and custodial services, that make it easier to buy, sell, and store the asset. This only adds to its standing as a legitimate financial asset.
The Lindy effect tells us that the future life expectancy of a new technology or idea is proportional to its current age. Therefore, the longer Bitcoin remains alive, active, and of interest to investors, the less likely it will be to die off and fail. And that’s why it deserves a place in portfolios.
Bitcoin is scarce
Michael Byrne: Another reason every investor should own at least some Bitcoin in their portfolio is the simple but important fact that there will always be a finite amount of Bitcoin in existence. Total supply is capped at just 21 million Bitcoins.
In a world where governments and central banks can print more money at any time, this inherent inelasticity is an appealing aspect. This capped supply and the global nature of the network make Bitcoin a viable option for people all over the world who want to have a safety valve against decreased purchasing power in their own currencies. Unlike the dollar, euro, or Turkish lira, no one can decide to print another million Bitcoins to ease monetary conditions.
The price of Bitcoin, like many commodities, is ultimately determined by supply and demand, and Bitcoin is becoming harder to obtain as time goes on. Over time, mining new Bitcoins will become increasingly difficult, due to a process known as halving, so fewer will be created in the future. At the start of 2022, about 19 million Bitcoins had already been mined, so there are only 2 million left, with the last Bitcoin expected to be mined in the year 2140.
This is in stark contrast to the elastic nature of fiat currencies. The United States printed more currency to support the economy and provide citizens with direct stimulus payments during the COVID-19 pandemic, which eventually led to inflation and decreased purchasing power for each dollar in existence. Other global governments did the same.
Bitcoin is a global network, and its potential as a store of value has even more appeal in countries like Turkey, where inflation has been rampant and the purchasing power of the lira has decreased markedly. In 2021, Morgan Stanley’s (MS 0.90%) Head of Emerging Markets and Chief Global Strategist Ruchir Sharma observed this dichotomy, noting that:
Led by the Fed, every major central bank has been printing money madly to keep economies afloat… undermining confidence in all national currencies. Twenty percent of all dollars in circulation were printed in 2020, and that binge was a huge boost to the appeal of Bitcoin, which was designed with a gradual process for ‘mining’ new coins and a limited supply.
I don’t know if the price of Bitcoin will go up or down tomorrow or even a year from now, but I feel good owning at least a small part of this finite asset as a hedge against future increases to the supply of other global currencies.
Bitcoin is the leader of crypto
RJ Fulton: Before the crypto asset class became as diversified as it is today, people who wanted to invest in cryptocurrency only had one option — Bitcoin. For this reason, Bitcoin’s market cap dominates the proportion of value that makes up the entire cryptocurrency asset class.
Due to this overwhelming value in Bitcoin, it serves a similar role to cryptocurrency as the S&P 500 serves to the stock market: Both act as indicators for overall health and trends. The only difference is that Bitcoin does this for crypto.
Up until 2017, Bitcoin made up more than 90% of all the value in cryptocurrencies. Today, that number sits at around 40%, but it was as high as 70% in December 2020. Over the last decade, the proportion of money in Bitcoin, relative to all other cryptocurrencies, dwindled — yet it still influences trends in crypto, even though its proportion of market share is shrinking.
To measure this, we can look at correlation values to get a better insight as to how other cryptocurrencies trade relative to Bitcoin. Values closer to one have a positive correlation to Bitcoin — meaning the cryptocurrencies follow similar price trends. A value close to zero indicates that there’s no correlation.
Ethereum, the second most valuable cryptocurrency by market cap, has a correlation value with Bitcoin above 0.8 over the last year — a very strong correlation. The third most valuable cryptocurrency by market cap (that isn’t a stablecoin) is Binance Coin. It has a strong correlation value of around 0.75 to Bitcoin. For any meme coin fans out there, Dogecoin‘s correlation to Bitcoin hovers around a strong 0.68.
Even though cryptocurrencies are notorious for being complex, investing in them can be simple. Although other cryptocurrencies offer attractive upside, in the end, they still trade similarly to the world’s original cryptocurrency over the long haul. Don’t over-complicate it — Bitcoin offers the safe and proven route.