The performance of Bitcoin continues to disappoint. At the time of writing it is priced at just over $3,700, having started 2018 at around $15,000. That’s a 75% fall in under a year, which wipes out most of the gains it made during 2017.
Although there have been various assertions made regarding the lower positive correlation which the virtual currency may have with the wider economy, thus far such ideas have proved to be inaccurate. The cryptocurrency has fallen harder than the FTSE 100, S&P 500 and most major indices in recent months. With investor sentiment being weak, there could be continued declines ahead in my opinion.
Just as during previous bull markets, risky assets have become more popular in recent years. Twenty years ago it was internet stocks, with companies being valued based on their projected revenues as opposed to their profitability. Then a decade ago, banking and financial services companies were riding high before they crashed as a result of weak balance sheets. Now, it seems as though a decade of rising share prices has caused investors to become increasingly interested in a virtual currency which has limited real-world potential.
In fact, Bitcoin is unlikely to ever replace traditional currencies. It lacks the required infrastructure, is generally unpopular among regulators and lawmakers, while its limited size means that it may never be big enough to have real-world use. And while investors have stated that it could offer uncorrelated returns compared to other assets, so far its price has followed investor sentiment lower.
Given that investors usually focus on lower-risk assets during periods of financial strain, it seems unlikely that they will seek to buy an asset which seems to be impossible to value and that could be worth next to nothing in a number of months. That may sound somewhat dramatic, but Bitcoin is showing no sign of mounting a turnaround. Since its valuation is based only on supply and demand, rather than any fundamentals, investors have no way of knowing what represents fair value. As such, it could be hit harder than mainstream assets should continued financial turbulence remain in place.
As a result, if stock markets keep falling then it would be unsurprising for the price of the cryptocurrency to fall below $1,000 in my view. Although I think that the blockchain technology on which it is built could have significant practical usage in the long run, Bitcoin seems to be a speculative idea which may be hit hard by weakening investor sentiment.
Rather than focus on buying Bitcoin, FTSE 100 and FTSE 250 shares could offer significantly better risk/reward ratios in the long run. The two indices offer historically-high dividend yields, a significant amount of diversity and proven track records of recovery from the most savage of recessions. As such, while Bitcoin may have enjoyed growth in previous years, its relative appeal now seems to be limited.
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