Bitcoin was one of the best performing assets that you could own during 2016. The price rocketed from $428 to $968, an advance of 126%. It has since continued higher and just hit its second highest price ever at $1,132 today. In fact, bitcoin has topped $1,000 for the longest stretch in history over the past two weeks!
The price spike above $1,000 that occurred during the first week of 2017 was the highest price for bitcoin since late 2013. Most mainstream analysts though that price spike was unjustified and that bitcoin would never reach towards $1,000 again. The long-term price chart for bitcoin going back to 2012 is shown below. As you can see the price went from under $5 in 2012 to $1,132 today.
Those that have dismissed the potential of bitcoin have been dead wrong. Bitcoin continues to thrive, with an increased adoption rate, increased usage and rising price that has proven all of the skeptics wrong.
After hitting $1,129 on January 4th of this year, news that the Chinese government was intervening in Bitcoin exchanges led to a sharp correction back to $775. At that time I suggested to my subscribers that anything under $800 would be an excellent buying opportunity.
In just over a month, the price has once again rocketed from $775 back above $1,100. This represents a gain of nearly 50% in just 5 weeks.
Bitcoin’s price volatility has driven many investors to avoid the digital currency. On the flipside, this volatility creates incredible profit opportunities for traders. And while it takes a certain type of person to stomach the swings, long-term investors are undoubtedly very pleased with the performance of bitcoin over time.
Here is a summary of the returns that you would have realized if you bought bitcoin on February 21st of each year:
2016: 158% (2.6X)
2015: 361% (4.6X)
2014: 102% (2X)
2013: 3,682% (36X)
2012: 26,247% (262X)
If you would have invested just $10,000 in bitcoin back in February of 2012, it would currently be worth $2.6 million today.
Bitcoin has several benefits over more traditional currencies, some similarities to gold and even some areas of superiority versus gold. These qualities are helping to drive the price higher.
Limited Supply / Inflation Hedge
The supply of Bitcoin is limited by to just 21 million that will be created at a predictable rate. The number of bitcoins generated per block is set to decrease geometrically, with a 50% reduction every 210,000 blocks, or approximately four years. In fact, this decreasing-supply algorithm was chosen because it approximates the rate at which commodities like gold are mined. Users who use their computers to perform calculations to try and discover a block are thus called Miners.
However, there will always much less than 21 million Bitcoin available to be spent. The total spendable supply is always lower than the theoretical total supply, and is subject to accidental loss, willful destruction, and technical peculiarities. According to bitcoin’s open source code, only 21 million coins will ever be created. Bitcoin is strictly limited in quantity and requires actual work/energy in the form of computer hashing power to create the coins. This stands in stark contrast to central bank money, which can be created in unlimited quantities instantly as a ledger on a bank’s balance sheet.
The chart below shows the number of bitcoins in circulation and the history of bitcoin creation over time. As you can see, just over 16 million bitcoin have been created thus far, with only another 5 million left to be created between now and 2024.
Because the monetary base of bitcoins cannot be expanded beyond the predictable rate gradually slowing until it reaches 21 million, it is likely to serve as an effective hedge again inflation. When you couple limited supply with increased usage and demand, it is a recipe for much higher prices over time. Consider that at the current time less than 1% of the population own bitcoin and this gives you some indication of the growth potential ahead.
Lack of Government / Banking Control
Bitcoin is a decentralized, free-market currency, outside of the control of governments or central banks. In China and other places with capital controls, we are seeing a significant rise in demand for bitcoin. As governments crack down on cash, limit bank withdrawals or restrict gold important, bitcoin is a logical alternative.
As currency wars heat up and various central banks around the world race to debase their currencies, it is causing capital flight. While many people have moved their funds back into the stocks, bond or real estate, those markets are all looking overvalued. A portion of these funds are no doubt rushing into the gold and silver market, with both precious metals up significantly over the past two years.
Transfer Funds Around the Globe Instantly and Free
Capital is also fleeing to bitcoin, a place where the Chinese (and others) can hide their assets from their government and easily transfer the assets across borders without any suspicion. In fact, you can send or receive millions worth of bitcoin from anywhere around the world, basically for free and instantly. With a bit of effort, you can also do this with near anonymity. Try doing that with funds in your bank account, stocks or even precious metals.
Ease of Use in Everyday Transactions
Bitcoin is also infinitely divisible and easy to use in everyday transactions via a computer or smartphone. I have on multiple occasions paid for computer hardware, Amazon.com purchases, business services and even lunch at a restaurant in California using bitcoin. You can spend bitcoin at a growing number of places directly, including Microsoft, Dell, Overstock.com, DISH Network, Newegg.com, Subway and plenty more. It is as simple as using a credit card but without the hefty credit card fees.
Risks of Using Bitcoin
Investing in bitcoin and storing them doesn’t come without risks. It takes a bit of technical knowledge if you want to store them on your computer or in cold storage. There are many horror stories of people losing thousands worth of bitcoin that they could not recover form their computer, erased from their hard drives or had stolen via hackers. Leaving them on an exchange seems like a better option for technology novices, but introduces third party risk.
Lastly, governments may find a way to intervene, lock up or limit access to your bitcoin or introduce legislation that adversely impacts the value of bitcoin.
How to Buy Bitcoin
Overall, I believe these risks are manageable and minor in relation to the bitcoin’s potential as a currency and the level of returns it has generated for investors. Despite the remarkable returns over the past five years, I still believe there is plenty of upside ahead and that bitcoin deserves a place in your overall asset allocation.
One of the cheapest and easiest ways to acquire bitcoin in the United States is using coinbase.com (you and I both get $10 in free bitcoin if you use this affiliate link). Coinbase allows you to easily deposit funds directly from your bank account for free. You can then purchase bitcoins on their website and either leave them with coinbase or transfer them to a software or hardware wallet in your control.
You can also purchase bitcoin from a growing number of bitcoin ATMs located around the country. Although the fees are relatively high, you can acquire bitcoin anonymously using this method. Coinatmradar.com offers a map and you can search via your zip code.
You can also purchase bitcoin directly from private parties using localbitcions.com. Set up a safe, public meeting place, show the funds, provide the seller with your bitcoin wallet address and that person can then transfer them to you via a computer or smartphone. You may want to wait a few minutes to get confirmation of the transfer, particularly with large purchases.
If you prefer to get exposure via your brokerage account, you can buy the Bitcoin Investment Trust (GBTC) on the OTC/Pink sheets.
Lastly, the SEC will be deciding on whether to approve the first bitcoin ETF on March 11th. The Winklevoss Bitcoin Trust (COIN), developed by the venture capitalist twins who were involved in a long-running legal battle over the ownership of Facebook (FB), might be approved as the first exchange-traded fund to track a digital currency by the U.S. Securities and Exchange Commission.
Approval of this trust may also be a catalyst for higher bitcoin prices, as it would increase access for more investors. Winklevoss celebrity status may also help to draw attention and geneate additional mainstream media coverage for bitcoin.
I believe that bitcoin deserves a place in every investor’s portfolio, even if you only take a small position. With the limited supply and increasing popularity, the price is likely to head much higher over time. I believe we could see the price of bitcoin double during 2017 and climb well above $5,000 by 2020. It is getting close to parity with the gold price. At some point, we will likely see one bitcoin worth more than one ounce of gold. But the two currencies need to compete and indeed are complimentary to one another. I think it makes sense to own both.
The Gold Stock Bull portfolio has been on fire lately. In addition to covering junior gold and silver mining stocks, we have been profiting with uranium miners, lithium miners, energy, agriculture and cannabis plays. We also cover cryptocurrencies, including Bitcoin, Ethereum and Monero in our monthly newsletter. I believe you will find it a steal for less than $1 per day and if it doesn’t pay for itself many times over, simply request a refund.