Bitcoin continued skyrocketing to new records, breaching the $20,000 barrier for the first time on Wednesday as investors and speculators jumped on board.
Some are eager to be part of the fun, and some fear missing out on all the gains their neighbors brag about. Masters of hype are now calling for a $30,000 price. Bitcoin recently traded at $20,755, up 6.9%, and has blasted 77% higher in the last three months.
But there are some caution signs. The digital currency is barely used in legitimate commerce. That means its strength is as a store of a value. But it’s only a store of value because buyers view it as such.
Given that bitcoin can’t be used to buy many legal products that have much value, its intrinsic worth is simply what people are willing to pay for it. And because so many people now believe in bitcoin, it can easily soar higher from here.
But if investors and speculators lose faith, the digital currency can easily plunge, as it did in February and March of this year, and from Dec. 2017 to Dec. 2018.
Bitcoin is really closer to gold than a currency. Gold, too, is mainly a store of value. While it does have uses for consumers and businesses, it’s primarily investors and speculators who determine its price.
Bitcoin would seem to provide diversification for a portfolio of stocks and bonds due to its high volatility and often low correlation to those two basic asset classes, as Morningstar's John Rekenthaler notes. Given the high volatility, you’d only need a small amount of bitcoin to get your diversification. Or put another way, a little dab'll do ya.
But things don't always work that way. Currently, stocks are rising at the same time as bitcoin. So as with any investment fad, caveat emptor.