Bitcoin offers crypto investors the ultimate combination of risk and reward.

If you want to put $1,000 to work in the crypto market right now, you’re probably looking for a cryptocurrency with significant upside potential. And given the current macroeconomic uncertainty, we are probably also looking for some measure of downside protection.

The search for a crypto investment with upside potential and downside protection may seem a little quixotic, but there is actually a cryptocurrency that offers both. Yes it is Bitcoin (Bitcoin 6.30%). If I had $1,000 to invest right now, this would easily be my top crypto choice.

The positive potential of Bitcoin

Some analysts now predict that Bitcoin could reach a price of $100,000 by the end of this year and $150,000 by the end of 2025. Given Bitcoin’s current price of $63,000, this means you could potentially double your original $1,000 investment in just 18 months.

And, if you take a long-term view of Bitcoin, the picture becomes even more attractive. According to Cathie Wood of Ark Invest, Bitcoin could reach a price of US$1.48 million by 2030. And if everything goes according to plan, she says, Bitcoin could reach a price of $3.8 million. So we’re talking about the potential to earn 25 times or even 50 times your initial investment!

That kind of price performance might seem a little fanciful. But not if you consider Bitcoin’s history. For much of the last decade, it has been the best-performing asset in the world, and it hasn’t even come close.

In the decade from 2011 to 2021, for example, Bitcoin delivered annualized returns of 230% per year. The next closest asset class (high-growth technology stocks) delivered returns of just 20% per year. It’s true that past results are no guarantee of future performance, but there is now a solid body of evidence that suggests Bitcoin has immense upside potential over a relatively long period of time.

Bitcoin Downside Protection

In terms of protection against losses, Bitcoin’s greatest strength is that it is an inflation-resistant asset. This is due to the algorithm that carefully controls the rate of creation of new Bitcoins. Every four years, as a result of a reduce by half, the rate of creation of new Bitcoins drops by half. It is because Coinbase Global now refers to Bitcoin as “a programmatically disinflationary asset.” Therefore, if your main concern is inflation, Bitcoin should be an attractive option.

Image source: Getty Images.

At the same time, Bitcoin also has notable scarcity, just like a precious metal. It is for good reason that many investors refer to Bitcoin as “digital gold”. The maximum lifetime supply of Bitcoin is limited to 21 million coins, and 19.7 million coins are already in circulation. As Bitcoin adoption grows across the world, the price impact of this scarcity will only increase.

And there is one more factor that gives Bitcoin downside protection: it is not yet correlated with other financial assets. Put another way, Bitcoin can zig when other financial assets zag. So even if the stock market crashes, there’s still a chance that Bitcoin won’t. This makes Bitcoin a very useful tool for portfolio diversification.

In fact, due to this historical lack of correlation, a growing number of investors now see Bitcoin as a safe haven which can help them avoid the slings and arrows of outrageous fortune. A big reason for this lack of correlation is that, until recently, Bitcoin was largely ignored by Wall Street and sat outside the traditional financial system.

The ultimate combination of risk and reward?

Bitcoin, of course, is certainly not without risk. As they say on Wall Street, there is no such thing as a free lunch. And Bitcoin exposes you to tremendous volatility. In a single 24-hour period, Bitcoin can rise or fall by 10% or more. Given that Bitcoin is traded 24/7 around the world, you could theoretically go to bed thinking you are a millionaire and wake up the next morning only to find that a significant portion of your wealth has been destroyed.

This is why it is so important to maintain a long-term perspective when investing in Bitcoin. This will prevent you from worrying about short-term drops in value. In the long term, it is difficult to think of a single financial asset that can surpass Bitcoin.

Yes, Bitcoin may no longer be able to offer the types of spectacular returns it offered early crypto investors. But from my perspective, it still offers the ultimate combination of risk and reward.

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