Where Will Bitcoin Be in 5 Years?

Key Points

• Bitcoin's value has soared nearly 1,000% over the past five years.

• The cryptocurrency is growing in legitimacy thanks to institutional adoption and the launch of Bitcoin ETFs.

• If the economy takes a turn for the worse, the bullish sentiment could shift.

• 10 stocks we like better than Bitcoin ›

Cryptocurrency values have risen since the beginning of this year, Bitcoin (CRYPTO: BTC) included. The world's leading crypto has seen its value spike 94% over the past 12 months, and it has soared nearly 1,000% over the past five years.

Part of the recent rise has come as the federal government has backed off on some regulations for cryptocurrencies and even announced the Strategic Bitcoin Reserve. But investors should know that crypto values have boom and bust cycles, and today's gains are no guarantee that more are on the way.

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So, where is Bitcoin headed? Here's what's going right for cryptocurrency and what could slow its value growth over the next five years.

Image source: Getty Images.

The bull case for Bitcoin

One of the biggest drivers of its value recently has been the launch of nearly a dozen Bitcoin exchange-traded funds (ETFs) last year. These ETFs were initiated by large financial institutions that commit to holding the digital coin, thereby making it easy for individuals to invest in the cryptocurrency without needing to own the coin themselves.

More than $100 billion has already been invested in these ETFs, which shows just how popular they have become in such a short time. Just as important, the fact that large financial institutions offer the ETFs gives credibility to Bitcoin. That may make some investors feel that owning these ETFs is part of a wise diversification strategy, rather than an off-the-beaten-path investment like other cryptos.

What's more, the U.S. government has made some moves lately that have helped spur interest in Bitcoin and other cryptos. First, it has backed away from some lawsuits involving crypto platforms and companies, with the Trump administration taking a lighter regulatory touch, for better or worse.

And the administration announced several months ago that it would set up the Strategic Bitcoin Reserve. The details have been sparse -- and the government has yet to make any new investments in Bitcoin itself -- but the larger narrative for crypto investors is that the crypto received an unprecedented level of institutional recognition with the announcement. By establishing a formal reserve, the federal government reinforces the perception among some investors that the digital coin, as with the backing of major financial institutions, is steadily gaining legitimacy.

The bear case for Bitcoin

Perhaps the most pressing concern for Bitcoin investors is its pattern of dramatic swings, where steep sell-offs sometimes follow strong rallies.

For example, during the most recent crypto winter, its value plunged 73% from a price of more than $60,000 in November of 2021 to just $16,400 a year later. That drop was fueled by investor pessimism as inflation ran rampant and the Federal Reserve subsequently began to rapidly increase interest rates.

Almost all investments have periods of decline, but the inherent volatility of cryptocurrencies has resulted in some very significant pullbacks following huge gains. And crypto declines are often more frequent, and severe, than what you get when investing in stocks.

To say there has been a lot of optimism for Bitcoin over the past few years would be an understatement. That doesn't mean it's inevitable that a crash is on the horizon, but some of the latest jobs data shows that hiring in the U.S. is slowing down.

Private-payroll data shows that just 54,000 jobs were added in August, according to ADP. If a cooling job market turns into an economic slowdown -- or a recession -- over the next five years, it's likely Bitcoin could follow its previous path and experience a sharp decline.

Where does this leave Bitcoin in five years?

I think it's fine for long-term investors to be generally bullish on Bitcoin. With the government taking a lighter regulatory approach to cryptocurrencies and financial institutions boosting its credibility with crypto-based ETFs, it appears that the digital token is becoming a much more established investment avenue than it was in the wild early days of crypto.

But I also think that investors are overly optimistic about stocks and cryptos right now, Bitcoin included. The general sense appears to be that the market -- and digital tokens -- can't lose, and that sentiment will eventually run out. If inflation ticks higher or unemployment numbers go up over the next few years, there's a good chance the token's value will fall.

That doesn't mean Bitcoin is a bad investment. But just keep in mind that if you buy now, you could be buying at the top, and you may need to muster a lot of patience to wait for its value to rebound.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.