Is Bitcoin a Good Long-Term Investment, or Simply a Momentum Play?

Bitcoin has been red-hot, shattering records by the day over the last few weeks. But is bitcoin a good long-term investment? Let’s examine.

We typically stick to stocks, options, and ETFs here at Cabot Wealth Network. But there’s no ignoring what’s happened with bitcoin and other cryptocurrencies in the last three months.

On October 7, bitcoin prices were $10,923. On January 7, the price of bitcoin closed at a record-high $40,797. Prior to that fourth-quarter 2020 boom, bitcoin had been stuck in the mud for years after peaking above $19,000 in December 2017. Many investors had given up on it as a hedge against stock prices, the dollar, and other currencies. Now it’s red-hot again.

Or at least it was…until the last two trading days, when bitcoin prices lost roughly 20% of their value.

Still, the bitcoin trend is undoubtedly up. But as it was in December 2017, the cryptocurrency is undeniably volatile, and its peaks tend to be followed by sharp declines. So that begs the question: is bitcoin a good long-term investment? Or is it only useful as a short-term momentum play in brief, exhilarating bursts?

Bitcoin vs. the Stock Market

The chart says it’s both. Here is a four-year chart showing the price movement in bitcoin (in red) since January 2017 versus the return in the S&P 500 (in blue):

Is bitcoin a good long-term investment? This four-year chart says yes.That’s a better than 3,700% run-up in bitcoin, and a mere 69.4% return in the S&P 500 over the last four years.

But look closer at that chart. There have been three big rallies in bitcoin in that four-year period: in 2017, when it raced from about $1,000 per bitcoin to better than $19,000 by year end. In the first half of 2019, when it zoomed from just under $4,000 at the start of the year to over $12,000 by the end of June. And then in the last three months.

All other times, bitcoin has been either stagnant or plummeting.

Consider: after the $19,000-plus top in December 2017, when all your friends who don’t normally talk about investing were asking you about bitcoin, the cryptocurrency completely crashed, losing 83% of its value in the ensuing year.

Following the rally in the first half of 2019, bitcoin prices again collapsed, dipping back below $5,000 by March of this year after nine straight months of losses. Then, like stocks in the wake of the February-March market crash, bitcoin rallied again, but really took off in the last three months of 2020, more than doubling its December 2017 by year’s end.

If you had the foresight to invest in bitcoin four years ago, you’d have made a ton of money today. But most people weren’t buying bitcoin in early 2017. Chances are, if you did buy bitcoin, you first did so in late 2017, when the noise surrounding it was at a fever pitch. If you did that, you likely either lost money, or (hopefully) sold off and booked a modest profit when cryptocurrencies were in freefall in early 2018.

The same thing would have happened if you bought on the rally in mid-2019. And if bitcoin was your first investment to start 2021, well, you’ve already lost money.

But is Bitcoin a Good Long-Term Investment?

Perhaps this time the steep drop-off is little more than a needed pullback after nearly quadrupling in price over the prior three months. The problem is there’s no way of knowing for sure. Bitcoin has so little history as an asset, and what little history it does have suggests that when the price goes south, it reaaallly goes south.

I’m sure it will back at some point. We just don’t know if that will be tomorrow, a few weeks from now, or another year from now. I’m not dismissing bitcoin’s utility in today’s digital world. It clearly has a place as the global financial system becomes increasingly digital and interconnected. It’s not going away.

My point is more to question its reliability as an investment right now. To me, bitcoin is like a banana: you could buy it as it starts to ripen, and it may taste great for a few days, but then it quickly develops bruises, loses its taste, and eventually turns black.

As the last four years have shown, bitcoin can be a very good long-term investment. But you have to get it at just the right time (i.e. not when everyone is talking about it), and you have to be willing to stomach some major ups and downs along the way.

I personally prefer the reliability of stocks. And if you need help finding the right ones, I’d suggest subscribing to any one of our 15 investment advisories, where our analysts routinely pick winning stocks and options trades that beat the market year in and year out.

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Chris Preston

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Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.

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Comments

  • Jodie H.

    Agree with your assessment of bitcoin. I like a little more stability. However there are other ways to “play” the bitcoin universe without the extreme volatility. One is SI. It’s sorta the bitcoin “bank”. Check it out.

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