The Motley Fool

Thinking of buying Bitcoin? Here’s why I think you could be set to make a huge mistake

The 80% fall in the Bitcoin price since December 2017 caught many investors by surprise. There was talk back then among some commentators that significant gains may be ahead for the cryptocurrency. However, over the intervening 16 months its price has collapsed, while many mid- and large-cap shares have surged higher.

Looking ahead, a recovery for the virtual currency cannot be ruled out. But with there appearing to be superior risk/reward opportunities available elsewhere, buying the asset could prove to be a major mistake.

Bubble

In years to come when investors look back on the fall of Bitcoin between 2017 and 2019, they may feel it was a somewhat obvious event. After all, it increased twentyfold in price during the course of 2017, which would suggest that a pullback of at least some kind was due. That was especially the case since the virtual currency’s outlook had not materially changed, with little evidence to explain why it was suddenly worth almost $20,000 versus $1,000.

As such, Bitcoin was essentially a bubble that was waiting to burst. Even after its 80% fall since December 2017, further declines could be ahead. As with many assets that experience bubbles which subsequently burst, the value of the virtual currency bears little resemblance to its price. In fact, its price is based solely upon supply and demand, having no fundamentals to provide guidance for investors to judge the price at which it should be trading.

Future prospects

Although Bitcoin was viewed as a sound means of diversifying a portfolio by some investors, due to its apparent low correlation with risky assets, that has not proven to be the case. As investor sentiment towards the stock market came under pressure, risk appetite among investors dissipated. This, in turn, contributed to lower demand for Bitcoin, which impacted negatively on its price.

With the prospects for the world economy uncertain, it would be unsurprising for the virtual currency’s price to come under further pressure. Weak consumer confidence in the US and a slowing Chinese GDP growth rate may contribute to increased risk aversion among investors, which could harm the prospects for Bitcoin.

Investing opportunity

In contrast, a number of shares continue to offer good value for money after what has been a mixed year for the stock market. With a range of FTSE 100 and FTSE 250 shares having strong balance sheets, sound cash flow and improving earnings growth prospects, now could be a good time to buy stocks rather than Bitcoin.

Certainly, a recovery for the virtual currency cannot be ruled out. However, buying the asset appears to be more akin to gambling rather than investing, due to the lack of data available in order to make a reasoned investment decision. As a result, buying the virtual currency could prove to be a costly mistake, with further falls potentially ahead.

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