You should buy Bitcoin now even if you think it’s a terrible investment.
I know it sounds crazy. But you’ll soon see why it makes perfect sense.
By now, just about everybody is aware of the huge gains in the Bitcoin price. It doubled in 2016 and rocketed 1,325% in 2017.
But if you use the right strategy, buying Bitcoin now makes sense for almost every investor.
Let me explain.
Why Investors Should Buy Bitcoin
The short answer to why buying Bitcoin is a good idea (even for those who despise it) is those extraordinary gains. Even a small investment has the potential to deliver mammoth returns.
Bitcoin is without question a high-risk investment, but the potential to multiply your initial stake many times over makes it a risk worth taking.
John Pfeffer, a London-based entrepreneur and investor who served as a partner at private equity firm Kohlberg Kravis Roberts for 11 years made this point in a December report on the investment case for cryptocurrencies.
“An investment with a 20x to 60x upside only requires a probability of success of between 2% to 5% to be a positive net expected value investment,” Pfeffer wrote. “Given where we are today in Bitcoin’s development and adoption, that the probability is higher than 2% to 5% – likely much higher.”
Another market analyst, Ronnie Moas of Standpoint Research, reached a similar conclusion in a cryptocurrency report published last July.
“There are risks involved here: hacking, regulation, bankrupt or crashing exchanges, scandal, conflict between miners and users, etc.,” Moas wrote. “An event that would cause the confidence in these currencies and in these markets to collapse would drag down the coin prices dramatically. That being said, when someone presents me with a situation where I can possibly make a 1,000% to 2,000% return over a period of 5 to 10 years, I am going to take that.”
To see just how powerful this strategy can be, let’s look at how it would have affected the portfolio of a typical investor over the past year…
How Bitcoin Can Supercharge a Portfolio
Consider an investor one year ago with a modest $25,000 portfolio.
On Jan. 1, she decides to invest 4% of her holdings into Bitcoin and put the rest in stocks. She buys one bitcoin for $1,000.
If Bitcoin goes to zero, and she loses it all, it’s only a 4% loss against her total holdings. Her stocks, if they slightly beat the S&P 500 Index, would have gained about 20%. That would leave her with $28,800 on Dec. 31 – more than what she started with despite the Bitcoin loss.
But as we know, that’s not what happened. Our hypothetical investor would have gained $13,250 on her Bitcoin investment, turning her $1,000 into $14,250. Including her stock gains, her portfolio is worth $43,050 – an increase of $18,050, for an eye-popping, one-year gain of 72.2%.
That’s why both Moas and Pfeffer view buying Bitcoin as worth the risk – provided you don’t go overboard.
That means restricting your Bitcoin investment to less than 5% of your portfolio. So don’t dump everything you own and go all in on Bitcoin, and don’t use money earmarked for other purposes (your child’s college fund).
And most definitely do not risk capital you don’t have. So no borrowing to buy Bitcoin, either. The best rule of thumb is to risk only what you can afford to lose.
Remember the Wall Street adage: Pigs get fat, hogs get slaughtered.
It’s also worth mentioning that, unlike stocks, you don’t have to buy whole bitcoins. As a digital currency, Bitcoin is divisible down to eight decimal places. You can buy any dollar amount you want.
That leaves the question of whether it’s too late to buy Bitcoin. What kind of gains can an investor possibly expect from here?
It’s very likely Bitcoin has realized only a fraction of its potential.
Why the Bitcoin Price Could Go Five Times Higher in 2018
In his report, Pfeffer outlines several major catalysts he expects will drive the Bitcoin price much higher.
First, he sees new investors coming on board in 2018.
“We are now seeing the much larger collective firepower of mainstream hedge funds, family offices and [high-net-worth individuals] starting to come in,” Pfeffer wrote. “This could very easily turn into a stampede for the entrance.”
Pfeffer thinks this could be enough to push the price of Bitcoin to $75,000 by the end of the year.
He also believes Bitcoin is gaining acceptance as a store of value and is in the process of attracting between $1.9 trillion and $6.1 trillion in that role.
Finally, Pfeffer says Bitcoin has a strong chance of becoming a global reserve currency, which would add another $2.8 trillion to $8.5 trillion of value. Long term, Pfeffer says these catalysts could drive the Bitcoin price to a range between $260,000 and $800,000.
That’s a big jump from Bitcoin’s current price of about $14,000 (it’s down 29% from its all-time high of $19,783).
Even the $75,000 target for 2018 represents a gain of more than 435%.
So let’s rerun our hypothetical investor scenario, again starting with $25,000. If she puts $1,000 into Bitcoin now, she stands to gain $4,350 – turning her original investment into $5,350.
Not a 1,325% gain, but way better than the S&P 500. And if she continues to hold for several more years, and Bitcoin rises to Pfeffer’s price range, she could see gains of between 1,750% and 5,600%.
She could end up with $57,000 on a $1,000 investment.
All for risking just 4% of her portfolio.
*This has been a guest post by Money Morning*