Here’s Why Bitcoin Isn’t Risky

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Cryptocurrencies in general are characterized by speculation, uncertainty, and extreme volatility. These characteristics can certainly deter even the most seasoned investors from jumping into the booming asset class. Even Bitcoin (CRYPTO:BTC), the oldest and most developed cryptocurrency in the world, experiences extreme price movements like an endless roller coaster ride.

But based on my arguments below, I will prove that Bitcoin is basically not a risky asset at all. This statement is not as bold as you might think. Keep reading and you might find yourself wanting to own Bitcoin.

Image source: Getty Images.

The traditional definition of risk is wrong

Modern portfolio theory, an investment framework developed in the 1950s by economist Harry Markowitz, defines risk as volatility. In other words, the more the price of an individual stock fluctuates, the riskier it is. This mindset permeates the investment industry. I believe this is a surprisingly flawed approach.

Warren Buffett, chairman and CEO of conglomerate Berkshire Hathaway and arguably the greatest investor of all time, sees risk differently. He sees in it the possibility of a permanent loss of capital. Many other top investors take the same view. This perspective results in making investments only where the probability of losing money is low, not how much the stock price fluctuates.

Roku (NASDAQ:ROKU), for example, is a very volatile stock. But it’s a competitively advantaged company that’s benefiting from the great secular shift toward streaming entertainment. And its stock has returned over 600% since its IPO in September 2017. On the other hand, a dying company that is losing revenue every year and has no competitive advantage might be considered less risky because its share price may not fluctuate as much. . It sounds absolutely ridiculous, and it shows that the traditional definition of risk might need an update.

It’s all about purchasing power

Let’s go a little further. In addition to being the possibility of a permanent loss of capital, the risk can also be thought of as a loss of purchasing power over time. Holding on to cash for many years would be a reckless financial decision because inflation reduces the value of a currency and, in turn, causes goods and services to become more expensive over time. Therefore, holding financial assets that appreciate in value above inflation is the most effective way to reduce inflationary risk.

With this framework, it is easy to see that Bitcoin has, in fact, never been risky at all. Early cryptocurrency investors have reportedly seen their purchasing power skyrocket over the years, with the coin’s value rising from around $900 five years ago to over $35,500 today. Sure, the ups and downs in the price of Bitcoin are hard to bear, but that’s to be expected when it comes to an entirely new technology that has the potential to fundamentally change the way people interact and exchange value in the digital world.

Bitcoin has been in the limelight since its inception in 2009, and it’s still around today with a market value of $672 billion. As time goes by and more and more institutions start to take it really seriously, the chances of bitcoin dropping to zero decrease significantly. If you haven’t already, I think now might be the time to jump on the bandwagon.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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