Over the past 12 months, the bitcoin price has been on a wild ride. This time last year, the price of the crypto asset was just over $3,200 and was still a relatively unknown phenomenon. Only a few months later the price peaked at $19,300 and had become a global talking point.
However, since topping out at nearly $20,000, the price has since retreated. It currently trades at $8,200, slightly above the one-year low of $6,200. But I believe that this could be just the beginning of a dramatic comeback.
A growing reputation
It has become clear that last year’s bitcoin euphoria was indeed a bubble. Bitcoin may have its uses in the real world, but last year the market got ahead of itself valuing the asset, pushing the price near $20,000 even though there was very little real demand for the product. The price rise was mainly a result of speculators trying to make a quick buck.
The bitcoin boom and bust matches a pattern that’s been seen many times before — usually with stocks. After years of slowly gaining traction, the asset quickly attracts the attention of a wider audience, moving from the ‘takeoff’ to ‘enthusiasm’ stage. Media attention helps fuel the boom, which generally peaks when speculators believe a ‘new paradigm’ has arrived. In this case, the belief that cryptocurrency was going to replaced US dollars as the world’s primary currency.
Unfortunately, it usually follows that, after peaking, the price of any bubble asset rapidly deflates. Fear and despair among speculators results in intensified selling, which seems to have occurred earlier this year.
Eventually, a bottom in the price arrives and I believe this happened in June. The next stage is the ‘comeback’. When the dust has settled, after the boom and the bust, bubble assets tend to stage a rally. It seems as if bitcoin has now entered this part of the bubble cycle.
There’s been a dramatic change in attitude towards bitcoin over the past few months. The crypto asset is no longer front-page news, but supporters of crypto assets have continued to work hard to build out the infrastructure underpinning the technology. Some of the world’s biggest tech firms continue to invest billions in blockchain, the technology behind cryptocurrencies, as well as other crypto asset technologies.
In other words, while bitcoin might be off the front pages, the tech industry is still working hard to unlock its full potential.
I believe bitcoin is still very much a speculative asset. But now the euphoria around it has died down, it might be the time to buy based on the pattern of previous bubbles. As money continues to pour into the crypto world, over the next few years bitcoin’s potential could really start to shine through. And due to the limited number of coins available, this could send the price skyrocketing.
That said, with no real tangible asset underlying bitcoin, I’d caution investors not to speculate on this rally with more than they can afford to lose. If you’re well aware of the risks involved, now could be the time to buy.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.