BITCOIN EXPLODED IN popularity in 2017, skyrocketing from less than $1,000 in January to more than $19,000 in December, before ending the year just above $14,000. It’s been a rollercoaster ride ever since. Bitcoin ended 2022 at $16,600, far below its 2021 all-time high of almost $69,000, only to rally strongly in 2023, finishing the year at close to $42,000.
Still, bitcoin has proven far more stable and durable than other cryptocurrencies. During 2022’s cryptocurrency rout, it held up better than many other digital currencies. Indeed, over the past decade or so, 2,000-plus cryptocurrencies have failed, a clear warning sign for buyers.
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 has 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 major 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.
Some have hoped that bitcoin would prove to be a safe haven during rough financial markets. That didn’t happen in the bear markets of either 2020 or 2022. Others have hoped cryptocurrencies would fare well during periods of escalating inflation. That also hasn’t happened.
Nonetheless, there’s some chance bitcoin will indeed prove to be a long-term hedge against inflation, similar to gold, with a return equal to the global inflation rate. As such, while you might be able to make a short-term speculative gain, bitcoin is 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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