Bitcoin crossing $100,000 per BTC on December 5, 2024 was a fresh reminder of how disruptive and transformative this cryptocurrency has been.
While it has had its doubters, that has not stopped its rapid rise since its launch in 2011.
Furthermore, 2024 is the year that Bitcoin made a major move into the traditional investing space. On January 10, 2024, the Securities and Exchange Commission (SEC) approved Bitcoin ETFs, a move that led to a rapid rise in the trading volume of ETFs.
Trump’s sounding of a strategic bitcoin reserve for the United States (coupled with the appointment of a pro-crypto chairman of the SEC) has also rekindled talks about the place of Bitcoin in public finance.
Yet, arguments about whether Bitcoin is a true investment asset continue to rage. While enthusiasts will wax lyrical about its function as a store of value and inflation hedge, doubters will put question marks about these and raise concerns about volatility and regulatory uncertainties.
So, is Bitcoin a good investment that belongs to your portfolio in 2025? In this article, we will review the arguments from both sides so you can decide the matter for yourself. We’ll cover:
- The arguments for Bitcoin as an investment asset
- The arguments against Bitcoin as an investment asset
- Is Bitcoin a good investment for 2025?
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1. The arguments for Bitcoin as an investment asset
Let’s start on a positive note by reviewing the arguments of enthusiasts for Bitcoin’s value as an investment asset.
Bitcoin as a store of value
An asset is a store of value if you can hold it for a long period without a depreciation in its value due to inflation or devaluation. In other words, an asset is a store of value if it can preserve its worth or purchasing power over time.
Scarcity is one characteristic that makes an asset a store of value. This is why some investors still cherish precious metals like gold and silver today.
Interestingly, Bitcoin is also a scarce asset. The supply of this cryptocurrency is limited to 21 million BTC and more than 19 million of that is already in circulation. Thus, the value of Bitcoin cannot be eroded by a massive surge in its supply.
Another factor in favour of Bitcoin as a store of value is its halving events. Approximately every four years, the reward for mining new Bitcoin is halved. This reduces the rate at which new Bitcoin enters into circulation.
Thirdly, some significant percentage of Bitcoin has been lost permanently due to people forgetting their private keys or some wallets being inaccessible. River, a cryptocurrency company, estimates about 3.7 million BTC are considered “lost” today.
Source: River Financial
In cryptocurrency parlance, Bitcoin is a disinflationary and potentially deflationary asset. As long as its demand is stable or increases, it will continue to appreciate since circulating supply cannot increase arbitrarily to erode its value.
“This halving, coupled with Bitcoin's fixed supply of 21 million tokens, means its supply schedule is disinflationary up until all 21 million tokens are released, at which point Bitcoin becomes deflationary,” according to Caleb and Brown, an asset management company. “This makes it one of the scarcest assets known to man.”
Bitcoin as an inflation hedge
Bitcoin’s similarity to gold – in terms of scarcity and store of value – has earned it the name “digital gold.”
Since many laud the value of gold as an inflation hedge, Bitcoin enthusiasts have applied the same argument to Bitcoin.
An asset is an inflation hedge if it can maintain its value or even rise in value when inflation is eroding the purchasing power of fiat currency.
“Now that real estate prices are off the charts and gold is inaccessible to the average American, crypto has become part of that inflationary hedge mix,” according to Chris Kline, the COO and co-founder of Bitcoin IRA, a platform that allows the inclusion of Bitcoin in a self-directed IRA.
An academic study by Sangyup Choi and Junhyeok Shin, researchers at the School of Economics of Yonsei University, South Korea, based on 2010-2020 data concludes: “Bitcoin appreciates against inflation (or inflation expectation) shocks, confirming its inflation-hedging property claimed by investors.”
Bitcoin as a diversification tool
“Bitcoin ETFs present an opportunity to diversify portfolios and improve returns,” according to Forbes. Even before the approval of Bitcoin ETFs, Robo-advisors had started allocating a portion of investors’ portfolios to Bitcoin via Bitcoin trusts.
A study of Morning Star data between 2012 and 2020 conducted by ETF Trends, an ETF news blog, found that the correlation between Bitcoin and both stocks and bonds is very low.
Correlation Among Various Asset Classes Between 2012 and 2020
Source: ETF Trends
Interestingly, Bitcoin had a lower correlation to other asset classes when compared to gold. For example, while Bitcoin’s correlation is 0.01 to the S&P 500, gold’s correlation is 0.02.
Given the above data, if gold can be a diversification tool, it seems Bitcoin can play that role as well.
Bitcoin as a payment method
When doubters say Bitcoin is merely a speculative asset with no utility, enthusiasts are quick to point to its role as a payment method.
They can point to the over 250 companies that accept cryptocurrencies, including Bitcoin, as a payment mechanism and the over 38,000 Bitcoin ATMs where users can buy and sell Bitcoin.
Popular companies like Shopify and Tesla have adopted it and they have been integrated with payment gateways like PayPal, Stripe, and Square.
Some of the appeals of Bitcoin as a payment method include lower transaction costs (compared to traditional methods), support of cross-border transactions, anonymity, decentralization, and security (secured by blockchain technology).
Bitcoin’s meteoric rise
Bitcoin going from $30.06 on June 10, 2011, to $95,865.30 on December 2, a 318,813% growth (and an 81.77% compounded annual growth rate) is nothing short of meteoric.
Bitcoin’s Meteoric Rise
Source: Coinmarketcap
Since one of the aims of investors is to earn good returns on their investments, Bitcoin’s outsized returns over the years make it a good investment asset, some will argue.
Even when we factor in risk, Bitcoin has proven that it can deliver higher risk-adjusted returns than some traditional assets. As shown below, Bitcoin has had a bigger Sharpe ratio than other asset classes between 2013 and 2023:
Source: Woobull
2. The arguments against Bitcoin as an investment asset
Now that we have heard from the enthusiasts, it’s time to give the doubters the mic.
First, we consider their reservations about the arguments for Bitcoin.
Bitcoin as a store of value?
Most of the assets we know that qualify as stores of value – gold, stocks, etc – have proved their mettle over the years. Bitcoin’s relative newness (just 13 years in existence) means we don’t have enough information to conclude that it can serve as a store of value over the long term.
“Scarcity by itself can hardly be a source of value,” according to Eswar Prasad, Senior Fellow, Global Economy and Development at The Brookings Institution, a US policy think tank.
A store of value must also be durable and devoid of extreme fluctuations in its price. Bitcoin is not old enough to establish the former and its brief history has shown that the latter is the norm (more below).
Bitcoin as an inflation hedge
Again, the relative newness of Bitcoin is a concern.
“With just over a decade in existence, Bitcoin's performance in a diverse range of economic scenarios is not entirely known,” according to Nasdaq. “Its behaviour during inflationary periods, in particular, remains largely untested. Given that inflation tends to occur over long timeframes, Bitcoin's longevity and stability in such conditions are yet to be fully evaluated.”
Similarly, Bitcoin’s dominance has come at a period when inflation has been relatively (historically speaking) low and stable.
“There’s really no historical data on Bitcoin as an inflation hedge,” said Adam Perlaky, senior analyst at the World Gold Council. “There’s effectively been no periods of high inflation during Bitcoin’s existence. There’s no data to back it up.”
Similarly, Bitcoin, unlike gold, does not serve as a haven during economic downturns. An academic study by researchers in Ireland and New Zealand based on performance during the COVID-19 pandemic, published on Science Direct, concludes: “Bitcoin and Ethereum are not a safe haven for the majority of international equity markets examined, with their inclusion adding to portfolio downside risk.”
Bitcoin as a diversification tool?
Doubters won’t disagree with ETF Trends about the low correlation of Bitcoin with other asset classes between 2012 and 2020.
However, they would note that Bitcoin’s correlation has been increasing since 2021, casting doubt on its performance as a diversification tool.
“Bitcoin follows general market trends for stock stability and surges,” according to Bitcoin Magazine Pro, a Bitcoin blog. “Bitcoin has recently begun to mimic the stock market even more closely. Bitcoin and the S&P 500's 90-day correlation reached record levels in March. As of 2022, there's been no sign of a Bitcoin stock market decoupling.”
The International Monetary Fund (IMF) noticed the same trend: “The correlation of crypto assets with traditional holdings like stocks has increased significantly, which limits their perceived risk diversification benefits.”
Correlation Between Bitcoin and U.S. Stocks, 2017-2022
Source: International Monetary Fund
Bitcoin as a payment method?
Prasad has highlighted many issues that have plagued Bitcoin’s journey as a payment method: high transaction fees, slow transaction processing (takes about ten minutes to validate most transactions), doubts about anonymity and security (successful government tracking), and unstable value.
“While Bitcoin has failed in its stated objectives, it has become a speculative investment,” he concludes. “This is puzzling. It has no intrinsic value and is not backed by anything.”
Moreover, Bitcoin faces competition from stablecoins like USDT and USDC, other cryptos that offer faster and cheaper transactions (Solana, Cardano, Avalanche, to name a few), digital payment methods, and even Central Bank Digital Currencies.
However, not everyone has given up on Bitcoin’s potential as a medium of exchange. Ease of transfer, limited supply, and absence of a controlling central authority, remain positive attributes that could make it a global money.
“Bitcoin is not yet global money, but it has the right attributes to be a better form of money than either gold (difficult to transfer or verify over long distances) or government currencies (loses substantial value over time),” according to Sam Roberts, Director of Investment Consultancy at Cartwright Pension Trusts, a company providing actuarial and financial services to defined benefits pension trusts in the UK.
“Part of the utility of Bitcoin is that it can be used without permission and sent almost instantly anywhere in the world for almost free,” he continues. “This can enhance global trade and provide an escape route for the politically persecuted or those caught in the crossfire of an inflationary local currency or authoritarian regime.”
“Bitcoin is not yet global money, but it has the right attributes to be a better form of money than either gold or government currencies.”
Sam Roberts, Director of Investment Consultancy at Cartwright Pension Trusts |  |
Nevertheless, even Roberts agrees that Bitcoin has a long way to go to become a global money. “As an emerging money, bitcoin therefore has to go through certain phases to become a global money.”
Second, doubters will point to some of the key problems with Bitcoin:
High volatility
Nasdaq said it best: “It's crucial to note that the value of Bitcoin is primarily driven by market demand and supply, with no tangible asset backing it up. Thus, the price can be volatile, experiencing dramatic rises and falls over short periods, even more so than traditional investments. “
They gave an example of how Bitcoin’s price moved from nearly $20,000 to a little above $3,000 between late 2017 and 2018. Similar volatile movements abound.
Its fixed supply – which makes it disinflationary and potentially deflationary – is also one reason for its volatility. “This fixed cap creates extra price volatility and means that if there is a sudden surge in demand for whatever reason then the price can rise dramatically,” according to Roberts.
This high volatility reduces its appeal as a medium of exchange and investors who may need to sell at any point may find it unappealing.
However, enthusiasts will mention that Bitcoin’s volatility has been declining in recent times. “Over the last 12 months, bitcoin's average annual volatility stood at 35.48%,” according to Forbes. “While this still exceeds the volatility of all other assets analyzed, the gap has noticeably narrowed compared to the 10-year period.”
A study by Andrew Keenan, a corporate credit associate at Texas Farm Credit, and Vibhu Gomatam, a student at the University of North Carolina, published by the CFA Institute found the same trend, as shown below:
Bitcoin’s Daily Realised Volatility, 2013-2024
Source: CFA Institute
Nevertheless, Bitcoin remains a more volatile asset than most other asset classes (especially stocks, bonds, and gold). The chart below, provided by Keenan and Gomatam, shows Bitcoin’s daily realised volatility compared to other asset classes during selected market shocks:
Bitcoin’s Daily Realised Volatility Compared to Other Asset Classes During Selected Market Shocks
Source: CFA Institute
Regulatory concerns
“Despite gaining wider acceptance, cryptocurrencies are still subjected to legal and regulatory uncertainties across different jurisdictions,” according to Nasdaq. “There have been instances where governments, including China and India, have restricted or banned the use of cryptocurrencies, impacting their value and liquidity.”
Concerns about the environmental impact of cryptocurrencies and their usage in illicit transactions continue.
However, discussions around the environment and the usage of Bitcoin for illicit transactions tend to be unbalanced.
Regarding impacts on the environment, there is also a need to highlight the positive impacts of Bitcoin mining on the environment. “Bitcoin mining has many environmental uses too, such as reducing methane emissions from landfills and gas flares, stabilising electrical grids by providing instant flexible demand, and providing a source of revenue to any stranded sources of energy such as biogas, hydropower, or wind and solar farms yet to be connected to the grid,” according to Roberts.
While people do use Bitcoin for illicit trade, this is not a unique problem of digital currencies. “Illicit trade is wider than just the dark web and the US dollar is used for about 10 times more illicit trade (wider definition) than bitcoin, “ according to Roberts. “In any case, because sound money should have no counterparty risk it allows enemies to trade goods and services, which reduces the likelihood of those governments/populations going to war with each other.”
Uncertainty still remains though about what regulations will look like in the future. “Governments are faced with the complex task of striking a balance between encouraging innovation and protecting consumers,” according to the World Economic Forum. This has resulted in diverse regulatory approaches, a fact that has both advantages and unintended consequences.
Roberts believes that governments can get in the way and slow adoption through regulations that try to control human interaction with Bitcoin. On the other hand, they can aid adoption by imposing as few regulations as possible, focusing on fraud and negligence of custodians, and exempting Bitcoin from capital gains tax.
3. Is Bitcoin a good investment for 2025?
Should asset owners and asset managers include Bitcoin in their portfolios in 2025?
As we have seen, this is not an easy question to answer. Each asset owner or manager will have to make this decision for themselves. However, we can highlight some pointers based on all we have discussed:
- The real reason for including Bitcoin in a portfolio: It seems that the traditional reason for including Bitcoin in a portfolio – inflation hedge and protection in market downturns – is not viable.
What is viable is the ability of Bitcoin to provide higher risk-adjusted returns (via a higher Sharpe ratio, for example). A 2022 academic study by researchers in Portugal supported this:
“Results show that Bitcoin can improve the Sharpe Ratio of an already diversified portfolio, however, the inclusion of Bitcoin has to be done in proportions averaging 3.83 percent of the portfolio’s weight.”
Roberts also agrees that Bitcoin can improve the risk-adjusted returns of a diversified portfolio. “Within a diversified portfolio, a bitcoin allocation of 2% to 5% materially improves the risk-adjusted return of the overall portfolio,” he said. “This is because of its attractive asymmetrical growth profile and its generally low correlation to other assets. Bitcoin is a portfolio constructor’s dream asset!”
Put differently, asset managers may still need to stick to traditional hedging tools – gold, options, futures, etc. – and use Bitcoin more as a way to boost portfolio returns.
- Concerns about volatility: The volatility of Bitcoin is falling. Even if it’s still higher than that of stocks, bonds, and gold, it shows that some of the rapid price swings that happened in the past may not repeat themselves.
Also, if Bitcoin becomes more established as a medium of exchange, volatility will further reduce.
“As bitcoin matures, we would expect it to become more widely owned, with lower annual returns and lower price volatility (as its widespread use will mean greater liquidity and greater day-to-day spending of bitcoin),” according to Roberts.
He even believes that if Bitcoin transitions from being seen as a risky asset to a haven asset, it will begin to provide protection during market and economic downturns.
“When bitcoin transitions from being seen as a risky volatile asset to a safe haven asset with no counterparty risk, the price rise during a credit crunch or recession could be mind-blowing!”
Furthermore, asset owners with a long time horizon may not need to worry too much about short-term price fluctuations.
Also, since Bitcoin is now more closely correlated to the stock market, traditional tools used to hedge against stock market downturns can be used to hedge against the high volatility of Bitcoin.
- Demand drivers beyond utility: While Bitcoin’s position as a payment mechanism has been weakened, the price keeps rising. Since future price increases depend on demand, many traditional investors are concerned about what will drive Bitcoin higher.
However, in the cryptocurrency world, demand does not seem to depend entirely on utility. Favourable regulations (which many are expecting in the US with Trump’s presidency), strong communities, adoption by traditional finance, and positive market sentiment can cause price surges at any time.
This seeming lack of intrinsic value will be concerning for some asset owners and managers while others will be content to know there are drivers of demand beyond intrinsic value that can produce incredible returns for their portfolio.
In the end, this is one area where you can benefit from the opinions and approaches of other investment professionals. Conversations with other investment experts can help you form a balanced opinion and Bitcoin and help you decide on how to approach it in your portfolio.
Would you like to learn more? Why not attend our Investment Breakfast on Thursday 30th January 2025 titled ‘Integrating bitcoin into institutional asset portfolios to improve outcomes’ where we will explore these topics in more detail and challenge the conclusions reached. Register here - Understanding Bitcoin Investment Breakfast | cio investment club
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Takeaways
- Though Bitcoin continues to rise, arguments about its investment value continue.
- Proponents highlight Bitcoin’s scarcity, potential as an inflation hedge, diversification benefits, and outsized returns.
- Critics counter that Bitcoin’s volatility, limited historical performance, and regulatory uncertainties make it a speculative and unproven asset.
- Bitcoin’s utility as an inflation hedge or payment method is questioned, but its strong returns and ability to enhance portfolio Sharpe ratios are arguments for inclusion in portfolios.
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