If you invested $1,000 in Bitcoin in 2013, this is how much you would have now

Perhaps the most important market development in recent years has been the rise in popularity of cryptocurrency. This new asset class, which now consists of tens of thousands of different tokens, has made some lucky early backers wealthy. But it has undoubtedly caused some speculators to lose money as well.

The world most valuable cryptocurrency, Bitcoin (BTC -0.96%), has shined and been one of the best financial assets in recent years. And even a small dollar amount in the top crypto could have been life-changing for investors.

Bitcoin has produced a monster return

Since 1 May 2013, S&P 500 has given a total return of 187%. That’s not too shabby, but it doesn’t hold a candle to Bitcoin, which has seen its price shoot from $145 per coin to more than $20,000 today. That monster performance equates to a whopping 13,900% return (as of this writing). And this means that a $1,000 investment in Bitcoin back then would be worth a whopping $140,000 today.

You will be hard pressed to find a more lucrative investment in the same time period. Some of the most famous growth technology stocks don’t even come close. E-commerce and cloud computing Amazon and streaming service provider Netflix have posted returns of 876% and 692% respectively since May 2013. That’s not even in the same ballpark as Bitcoin.

Up to this point, Bitcoin has been used as a tool for financial speculation, a general characterization that can be made for all cryptocurrencies. But in addition to the bull case arguing that it will continue on its way to becoming a legitimate store of value, as a digital goldBitcoin’s most ambitious goal is to become a global currency.

At first glance, this may seem like an impossible task, given that it would undermine the power that governments and their central banks have over the money supply within their borders. However, consider the massive quantitative easing that has occurred in the US since the Great Recession and during the coronavirus pandemic. The US is now experiencing the highest inflation in four decades. And this doesn’t even take into account what citizens of developing economies see, in some cases corrupt regimes and hyperinflation. Within this framework, it makes sense to take Bitcoin as a medium of exchange.

Should Investors Buy Bitcoin?

Not surprisingly, an investor, whether retail or institutional, is often first exposed to cryptocurrency by buying Bitcoin. Bitcoin is the oldest and most developed digital asset, not to mention the most liquid and most valuable. This situation has resulted in there being a ton of supporting financial infrastructure built around Bitcoin, making it incredibly easy to buy.

For example, Blockits cash app, PayPal Holdingsand Robinhood Markets all allow users to seamlessly buy, hold and sell Bitcoin. Coinbase Global, the leading US crypto brokerage and exchange, also provides institutions with these capabilities. And you can’t ignore the growing number of Bitcoin-focused exchange-traded funds on the market today.

Before buying Bitcoin, investors need to get comfortable with its extreme volatility. Over the past five years, Bitcoin’s price has experienced a decline of at least 50% on three separate occasions. This includes the 71% drop (at the time of writing) after it hit an all-time high of nearly $69,000 per coin last November. This up-and-down activity cannot be avoided.

Furthermore, due to the unknown regulatory future and still nascent level of adoption, I believe the correct strategy for long-term investors is to allocate only a small amount of a well-diversified portfolio, less than 5%, to Bitcoin. If Bitcoin can match its past and generate greater performance, this will surely move the needle for the overall portfolio. But if it doesn’t, investors should be able to handle a price drop because the allocation is small and manageable.