The Motley Fool

3 reasons why I’m avoiding Bitcoin like the plague

While there’s been a resurgence in Bitcoin interest of late, it’s not an asset that appeals to me. Certainly, it’s made strong gains in recent weeks, with investors appearing to become increasingly bullish about its prospects. But with it being highly volatile, sensitive to changes in investor sentiment, and there being an opportunity cost in terms of buying other assets, Bitcoin seems to be worth avoiding, in my opinion.

Volatility

While the stock market can be volatile at times, Bitcoin appears to be exceptionally volatile most of the time. Furthermore, there seems to be little tangible reason for its price to change so significantly in the short run.

For example, with many company valuations, their price changes can be traced back to economic data or even how the prospects for their particular industry have altered recently. In Bitcoin’s case though, its price seems to fluctuate solely based on investor sentiment, with demand the biggest factor on its short-term performance.

Holding an asset that’s highly volatile and which is difficult to understand why its price changes as it does, means that buying Bitcoin could be a stressful and time-consuming experience compared to other assets such as shares.

Investor sentiment

Since Bitcoin seems to be highly correlated to changes in investor sentiment, it could experience a challenging period over the medium term. Certainly, investors have become more bullish since the start of the year, with major indices such as the FTSE 100 having made strong gains so far in 2019. However, that situation may not last over the medium term, with the potential for investors to become increasingly cautious.

There are a number of risks facing the world economy that could cause investors to become increasingly concerned about its future prospects. Brexit, a slowing China, US-China relations and mixed economic data coming from the US may all weigh on investor sentiment. Since Bitcoin seems to be a risky asset which only performs well at times when other risky assets do likewise, it could be hit hard by potential challenges that may be ahead for the world economy.

Opportunity cost

Having fallen heavily in 2018, a number of FTSE 100 and FTSE 250 shares still seem to offer good value for money. In fact, the FTSE 100 has a dividend yield of over 4% at present, which suggests it has a wide margin of safety.

This could mean there are a number of shares worth buying at the present time. Although they may be impacted in some cases by an increasingly uncertain outlook for the world economy, there are many defensive stocks that have proven unpopular in recent years that could become increasingly in-demand among investors.

As such, while Bitcoin’s recent rise may tempt many investors, low valuations across the FTSE 350 could offer superior risk/reward opportunities for 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.