BITCOIN EXPLODED in popularity in 2017, skyrocketing from less than $1,000 in January to more than $19,000 in December, before backing off from those dizzying heights and ending the year just above $14,000. The decline turned into a rout in 2018, with bitcoin finishing the year at $3,700.
The end of cryptocurrencies? Just when pundits were writing off bitcoin, it came roaring back in 2019, ending the year at $7,000. Some had hoped that bitcoin might prove to be a safe haven during turbulent financial markets. That didn’t happen in 2020’s turbulent first quarter, with the price sliding to $6,400. Instead, the big bitcoin rally happened amid the stock market’s recovery, with the cryptocurrency finishing 2020 at $29,000 and soaring to $59,000 by the end of 2021’s first quarter.
Bitcoin may be intended as a new currency, but it also has similarities to an alternative investment—and perhaps the closest parallel is gold. Neither bitcoin nor physical gold have any intrinsic value: They don’t pay interest like a bond and they don’t generate earnings and dividends like a stock. Instead, the value ascribed to both bitcoin and gold is born mostly of faith and trust.
True, gold has some limited use—mostly for jewelry—and historically it has been recognized as a store of value by some governments, while bitcoin can make neither claim. Still, like gold, bitcoin has a value largely because owners trust that the supply is limited and because they have faith that others will also view it as valuable.
In some ways, bitcoin is superior to gold. While both are recognized as a medium of exchange not controlled by any national government, bitcoin should be cheaper to buy, hold and sell. You don’t have all the costs associated with trading and storing gold.
In recent years, bitcoin has been subject to large speculative swings in value. But assuming the market for bitcoin isn’t discredited or replaced by some other virtual currency, all you can expect from bitcoin over the long run is a return equal to the global inflation rate—which is exactly what you can expect from gold. As such, while you might be able to make a short-term speculative gain, it’s unlikely to be a great long-run investment. What if you do make large gains? There’s good news: The IRS has said that profits earned by bitcoin owners will be subject to capital gains taxes, not income taxes.
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