What to Make of Bitcoin
The digital currency has delivered dizzying gains—and is just as volatile as ever.
The price of bitcoin was already soaring when Tesla announced in February that it had bought $1.5 billion worth of the digital currency, sending its value climbing higher. The electric-vehicle maker said it would soon accept bitcoin as payment for its products, too. But in truth, Tesla was a tad late to the party.
Several well-known firms had already embraced bitcoin in one way or another. Massachusetts Mutual Life Insurance, a 170-year-old insurer, bought $100 million worth of bitcoin in late 2020 for its general investment accounts. MicroStrategy, a business services company, has been buying millions in bitcoin, which represents the majority of its cash reserves. And Mastercard and PayPal have each said customers will soon be able to use bitcoin to pay for purchases through their respective networks. All told, demand has driven up the price of the cryptocurrency by nearly 450% over the past 12 months. Its market value is just under $1 trillion. (Returns and data are through March 5.)
Does that mean it’s time for regular folks to buy bitcoin? Not necessarily. There are pros and cons to buying it, and its recent popularity doesn’t erase its drawbacks, whether you view it as an investment or as a currency that you can use to buy things.
What is bitcoin? The 11-year-old cryptocurrency was the first of its kind. It gets its name from the technology behind it—every transaction is encrypted by computer code, known as blockchain technology, which eliminates the need for a middleman or a central bank. Ethereum, bitcoin cash (a spin-off of the original bitcoin) and litecoin are other well-known e-coins.
What’s driving the price? There is a finite supply of bitcoin. Only 21 million tokens will ever be made, and nearly 19 million bitcoins are already in circulation, so there are fewer than 3 million left to be created. And the rules around how the tokens are created—they’re awarded to bitcoin “miners” who solve complicated math problems—along with other restrictions mean a dwindling number of tokens will be issued in the coming years. The final bitcoin will be minted more than 100 years from now, in 2140.
Such scarcity is driving demand, says Tom Jessop, head of digital assets at Fidelity Investments. The brokerage and investment firm launched a passively managed bitcoin fund with a minimum $100,000 investment requirement, targeted at institutions. Since then, Fidelity has seen a lot of interest from a diverse group of clients, including hedge funds, registered investment advisers, pension and endowment funds, and corporate clients.
Will other digital assets displace bitcoin? Scarcity and increased demand could help bitcoin stay dominant. Yassine Elmandjra, a cryptocurrency analyst at Ark Investments, believes bitcoin will capture the lion’s share of the market for digital assets over time. “There may be room for two to five additional currencies that capture 25% to 35% of the total market share,” he says.
Is bitcoin a good investment? It has been over the past 12 months. But some investment professionals still view the virtual currency skeptically, including Matt Andrulot, executive director of research at Verdence Capital Advisors, an advisory firm for ultra-high-net-worth investors, in Hunt Valley, Maryland. “It’s volatile and speculative,” he says.