The first one Bitcoin (CRYPTO: BTC) was mined 13 years ago. For the first three years it was worth less than a dime. But in 2011, it took a big step forward by reaching parity with the US dollar.

At the time, many people laughed at Bitcoin and claimed that it could never be used as a regular currency or as a long-term investment. But if you had taken the opposite view and bought a hundred Bitcoins with $ 100 that year, your investment would be worth $ 4.32 million today.

How has Bitcoin silenced the critics?

When Bitcoin was first created, the idea of ​​using computer chips to mine digital currency seemed odd and absurd. But in practice, it was not that different from using industrial machines to mine for precious metals.

Image source: Getty Images.

Like gold, Bitcoin is a finite resource. As more and more Bitcoins are mined, it becomes more and more difficult and less profitable to mine new Bitcoins. At first, Bitcoin could be mined with high-end PC graphics processing units (GPUs).

But today Bitcoin cannot be mined efficiently with regular GPUs due to the time and energy required to mine a single Bitcoin. Instead, expensive devices known as Application Specific Integrated Circuits (ASICs) are now needed to mine a constant supply of Bitcoin. Yet the same economic logic applies to Bitcoin and precious metals: miners can only make money if the costs of machinery and labor do not exceed the market value of the metal.

Additionally, Bitcoin’s algorithm limits its lifetime production to 21 million Bitcoins. It is generally estimated that the last Bitcoin will be mined by 2140.

As more and more people understood these concepts, they began to value Bitcoin as an asset alongside gold and other precious metals. Additionally, the anonymity and security of Bitcoin transactions, which is enabled by a distributed ledger technology called blockchain, has also made it an attractive alternative to fiat currencies for financial transactions. A growing number of investors have also started to present Bitcoin as a potential hedge against inflation.

The future of Bitcoin

After Bitcoin reached parity with the US dollar, more investors, analysts, entrepreneurs and even governments have jumped on the bandwagon.

Pure Bitcoin mining companies like Digital marathon (NASDAQ: MARA) and Riot blockchain (NASDAQ: RIOT) appeared, cryptocurrency exchanges like Coinbase (NASDAQ: COIN) grew and the first Bitcoin exchange-traded funds (ETFs) entered the market.

Bitcoin evangelists like Jack Dorsey and Mark Cuban have sparked even more excitement from mainstream investors, as a growing number of retailers have started to accept Bitcoin as a payment option. El Salvador even became the first country to officially accept Bitcoin as legal tender last year.

ARK Invest’s Cathie Wood recently predicted that the price of Bitcoin will reach $ 560,000 by 2026, making your initial investment $ 100 to $ 56 million. Wood believes that Bitcoin can achieve this high price target if all institutional investors allocate only 5% of their wallets to cryptocurrency.

But it’s not all sun and rainbows

The future of Bitcoin may look rosy, but there are still a lot of challenges ahead. Government regulators around the world have put in place bans, restrictions, and taxes for Bitcoin and other cryptocurrencies. Countries could also develop their own digital currencies pinned to their own fiat currencies as a viable alternative to cryptocurrency.

The environmental cost of mining Bitcoin, which prompted Elon Musk to turn against cryptocurrency last year, is also raising red flags. Dutch economist Alex de Vries estimates that miners, if the price of Bitcoin reaches $ 500,000, will pump out more than 617 million metric tons of CO2 per year, which exceeds the carbon output of countries like Brazil and the Kingdom. -United.

Meanwhile, the volatility of Bitcoin could prevent it from being used for daily transactions. If fewer retailers adopt Bitcoin as a payment option, it could fail as a currency and continue to be used as a speculative investment.

Is it too late to buy Bitcoin?

Bitcoin’s volatility has prevented it from being an effective hedge against inflation in recent months. But that could change in the future if the price of Bitcoin stabilizes and regulatory headwinds ease.

I think investors should have some exposure to Bitcoin, but it should only occupy a small single-digit percentage of their portfolios. This way, you will profit if the price of Bitcoin skyrockets, but you will also not suffer lasting damage if the bubble bursts.

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