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Why I think this could be the beginning of the end for Bitcoin

Image source: Getty Images.

After a volatile start to 2018, the price of Bitcoin settled down in April and spent much of the next few months trading in a tight range of between $6,000 and $7,000. 

As I’ve written before, this stability helped improve sentiment towards the cryptocurrency. At the end of 2017 and during the first few months of 2018, it was typical for the price to move by more than $500 in a single day, which made it virtually impossible to use as an everyday currency. 

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It’s essential for the price of Bitcoin to remain stable if it’s to become a widely accepted monetary instrument.

However, after spending much of 2018 trading in a tight range, sentiment has significantly deteriorated over the past few weeks. Bitcoin has lost around half of its value since November 13, and it doesn’t look as if sentiment is going to improve anytime soon.

The beginning of the end 

Unfortunately, it looks as if this could be the beginning of the end for Bitcoin. 

As I’ve noted several times in the past, one of the big problems with the cryptocurrency is the fact that it has no underlying fundamental value. The value of each Bitcoin is only worth as much as someone is willing to pay for it, which means its price is determined by the market every day.

As sentiment towards Bitcoin has deteriorated rapidly, the amount investors are willing to pay for it has dropped. This creates a negative loop. The further the value of the asset falls, the further sentiment deteriorates, which will result in more selling, pushing the price down, reinforcing negative sentiment, and so on…

Analysts have tried to analyse why the value of the cryptocurrency has crashed in recent weeks. And there are several theories currently going around as to why investors have suddenly decided to dump Bitcoin. However, due to the nature of the Bitcoin market, and the fact that transactions are difficult to trace, means that we will never really know who’s selling and why they’re selling. 

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In many ways, the lack of transparency has only increased negative sentiment towards Bitcoin and other cryptocurrencies. Ever since Bitcoin first attracted mainstream media attention, headlines touting its potential have been accompanied by allegations of fraud and illegal activity. Several financial regulators around the world have announced investigations into certain areas of the cryptocurrency market and have tried to clamp down on illicit fundraising.

All of this negative publicity has not helped Bitcoin’s image. In many ways, the price of the crypto asset is a reflection of investor sentiment towards it. Using the price as a proxy of investor sentiment, right now, investor sentiment is at its lowest point since September 2017 and could fall much further over the next few months as the negative cycle of falling prices continues. 

Put simply, there could be further declines ahead for the Bitcoin price as investors continue to turn their backs on the crypto asset.

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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.

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