Is Bitcoin a Good Investment for Building Wealth?

A real wealth-building asset can grow in value over many years on end throughout all kinds of different economic and market conditions. Graded on that rubric, Bitcoin (CRYPTO: BTC) fails several of the conventional tests, as it has no dividends, no earnings, and plenty of volatility.

Yet the case for owning some as a wealth-building instrument has never been stronger. And the coming years will likely see it become an even more mainstream asset. So, is the coin a good wealth-builder after all?

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Supply, demand, and time are all on this asset's side

The point of Bitcoin is that it's a scarce store of value that becomes scarcer over time, and that is unlikely to change in any significant way.

On March 9, the network mined its 20 millionth coin, which means that over 95% of the 21 million BTC that will ever exist are now in circulation. The rest will trickle out at increasingly slower rates with every halving; the next halving will occur in April 2028. When paired with other supply constraints, plus demand, Bitcoin already has a working recipe for long-term price appreciation.

Between 2.3 million and 3.7 million BTC are thought to be permanently lost. Bitcoin's annual supply growth is now under 0.8%, and will only fall -- and it's already less than half of gold's estimated 1.5% to 2% annual supply growth.

On the demand side, spot Bitcoin exchange-traded funds (ETFs) brought in $18.7 billion in net capital inflows in the first quarter, pushing the combined assets under management of the ETFs past $128 billion. Furthermore, roughly 193 public companies now hold Bitcoin. Every coin entering a corporate treasury or an ETF is one fewer on the open market, thereby adding to the price impact of each incremental unit of demand.

Don't assume this will be an easy hold

Bitcoin has a handful of very favorable properties as a long-term wealth-building investment, even if it isn't a traditional candidate for a portfolio.

But none of its upsides guarantees a smooth ride, and that can be especially problematic for investors who target it to accumulate capital.

Despite the nickname "digital gold," Bitcoin has behaved more like a risk asset than a proven inflation hedge in times of rising price levels. Plus, it has a habit of declining by 80% relative to its high water marks -- though it has eventually always recovered. If you need your Bitcoin investment to be worth $X by year Y, it might be nowhere near that value when the deadline rolls around, and that makes it a very poor option for wealth building if it's the only part of the strategy.

Therefore, Bitcoin belongs as a supporting player in a wealth-building portfolio. A smaller Bitcoin allocation -- sized so a huge drawdown would not wreck your plans -- is enough to capture the asymmetric upside available from a scarce and increasingly institutionalized asset.

Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.