The bitcoin price has experienced a highly volatile year. In the last 12 months it has been as high as over $19,000, with it trading as low as under $6,000 in recent months. This high degree of volatility seems likely to continue over the medium term, with the virtual currency being highly susceptible to changes in investor sentiment.
Clearly, high volatility can mean that growth could return to the cryptocurrency. However, it also means that downside risk remains high. With bitcoin starting life at less than $1, could it return to its starting price over the coming years?
While bitcoin has been touted as a possible substitute for gold due to its low correlation to other assets, the reality is that bullish investor sentiment is a major reason for its rise in value in recent years.
Investors are currently enjoying a 10-year bull market that has seen asset prices surge higher across the globe following the financial crisis. Looking ahead, further GDP growth in countries such as the US and China is forecast over the coming years. In fact, the world economy is expected to grow by around 4% per annum over the next couple of years, and this could help to push asset prices even higher.
The result of this could be increasingly bullish investors who are even more willing to adopt a risk-on approach when it comes to investing. This could be good news for the bitcoin price, since greater risk-taking could allow it to perform relatively well over the medium term.
Of course, the long-term prospects for the virtual currency remain questionable. There is a growing threat from regulatory action, with a number of lawmakers across the globe having negative views of the cryptocurrency. This could weigh on its performance, while also having the potential to cause sudden falls in its price should new regulations be put in place.
Additionally, the virtual currency also lacks real-world usage potential. Due to its limited size and lack of infrastructure, it seems unlikely to ever provide a realistic alternative to traditional currencies. Therefore, its appeal as an investment may be low when compared to other assets which offer sound fundamentals and a basis for valuation.
One of the key challenges facing investors in bitcoin is knowing what it is worth. Clearly, all asset values are dependent upon investor sentiment to a degree. But while FTSE 100 shares, for example, have balance sheets, income statements and a track record of financial performance to provide guidance on how much their shares are worth, there is not comparative means of valuing bitcoin.
As such, a fall to $1 may sound unlikely, but cannot be ruled out. Equally, a surge back to its all-time high of over $19,000 is also possible. Therefore, it appears to be a gamble, rather than an investment. With the FTSE 100 offering a more favourable risk/reward ratio at the present time, it may prove to be a more worthwhile place to invest for the long term.
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