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. Indeed, during June 2022’s cryptocurrency meltdown, bitcoin fell below $18,000, lower than it had traded in December 2017. Still, during 2022’s rout, bitcoin held up better than other cryptocurrencies, some of which lost almost all value.
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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