The Motley Fool

3 reasons why the Bitcoin bubble is dangerous

With Bitcoin trading at $15k, many investors are becoming increasingly excited about its future prospects. There have even been predictions that it will become the ‘new gold’ or that it will reach $1m within the next few years.

While both of these predictions cannot be ruled out completely, the reality is that the cryptocurrency is unlikely to deliver further growth over the long run. Here are three reasons why buying or holding the virtual currency now could be a dangerous move for investors.

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Logistical problems

While the idea of a virtual currency is an obvious one given the digitisation of the global economy, Bitcoin does not look set to be a viable alternative to traditional currencies or other payment methods. The virtual currency lacks the checks and balances which give businesses and consumers confidence in accepting and using traditional forms of payment.

For example, a fault on a hard drive can lead to the loss of the cryptocurrency, while there is no facility to refund incorrect transactions. Furthermore, a major network of payment systems does not exist at the present time and with the number of Bitcoins being limited to 21m, supply will be insufficient for it to replace traditional currencies.

Regulatory issues

Until this year, it had been seen as a rather unsavoury asset by many investors. It had been used in illegal activities previously and while it is not being suggested that all Bitcoin transactions are linked to such activities, its popularity may be affected to some degree by its poor reputation.

Clearly, all forms of payment can be used for illegal activities and in this respect Bitcoin is no different. However, at the present time there is a lack of major regulations concerning it. If it was to become more widely held by investors and more widely used by consumers, increasing regulations seem likely. This could impact negatively on its value over the medium term.

Bubbles always burst

Since the very first days of trade and investing, there have been asset bubbles. There has yet to be any asset price rise which has continued in perpetuity. Therefore, after a 1,500% rise since the start of 2017 and an even greater increase in previous years, the Bitcoin bubble is set to burst at some point in the future.

Certainly, it may be possible for investors to buy now, make a quick profit and sell onto the next investor. However, with no logical justification for the virtual currency’s price to be anything near its current level, the risks in doing so could be huge.

A better idea may be to try and buy into an asset or industry where valuations are easier to determine and are relatively low. That way, it may be possible to buy at the beginning of a period of significant price rises, rather than arriving late at the Bitcoin ‘party’.

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