The Motley Fool

Bitcoin could crash below $1,000. This is what I think Warren Buffett would do

The price of Bitcoin is showing no sign of mounting a sustained recovery. At the time of writing, it has fallen by over 80% since reaching an all-time high of almost $20,000 in late 2017. In the near term, further falls could be ahead as a result of weak investor confidence. Reduced investor demand could mean that it declines to $1,000, or less.

With that in mind, it may be tempting for investors to buy Bitcoin. A fall in value could be followed by a recovery, after all. However, by following the general advice of Warren Buffett, it may be possible to avoid the risks posed by Bitcoin and, instead, benefit from the potential returns available on the FTSE 100, and wider stock market.

Falling value

The price of Bitcoin appears to have high positive correlation to investor sentiment. With investors becoming increasingly concerned about the prospects for the world economy in recent months, the price of the virtual currency has come under severe pressure. This isn’t surprising, since there are no underlying fundamentals, such as earnings or dividends, to justify the cryptocurrency’s value. As such, it’s solely based on demand and supply, with the former having the potential to decline in future.

Risks facing the world economy could cause investors to become even more bearish on the outlook for Bitcoin. A fall to $1,000, or even below, could be ahead, since the virtual currency has little real-world usage potential, lacking the required size or infrastructure to replace traditional currencies.

Warren Buffett

Clearly, Warren Buffett has been negative about Bitcoin in recent years. As with gold, its lack of underlying fundamentals means it has always lacked appeal for the ‘Sage of Omaha’.

For investors who already hold Bitcoin, Buffett’s advice on holding falling stocks could be helpful. He’s never been afraid to sell out of a stock which is underperforming if there are superior investment opportunities elsewhere. After all, Buffett believes that sometimes it’s better to jump from a sinking ship instead of trying to fix it.

For investors who are contemplating the purchase of Bitcoin, Buffett’s view that buying a great company at a fair price, rather than a fair company at a great price, may be relevant.

In the cryptocurrency’s case, it may be trading at a low price level compared to where it was less than 18 months ago. However, it appears to lack investment appeal. A variety of lawmakers have stated their concern about the virtual currency, and this could lead to regulation in future. It also has a limited size, which means that it lacks the scale to have real-world use. And since a variety of risks face the world economy, such as rising US interest rates and poor US-China relations, investor sentiment could weaken and send the Bitcoin price even lower. As such, it seems to be an asset to avoid at the present time.

In contrast, the stock market appears to offer a number of appealing investment opportunities. While potentially less exciting than Bitcoin, from a risk/reward perspective they may have much greater appeal over the long run.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.