The Bitcoin price has staged a dramatic comeback. Over the last month, the cryptocurrency has surged 50% back to above $8,000, which means since mid-December the price is now up more than 150%. Clearly, Bitcoin sentiment seems to be improving. So, what’s next for its price? Could it head back to $10,000, or even $20,000?
The argument for Bitcoin
Bitcoin bulls will tell you that the price is rising for a number of reasons. For example, they argue trade-war tension between the US and China is boosting demand for the asset because of its uncorrelated relationship with stocks.
Additionally, they’re excited Bitcoin is seeing a little more mainstream adoption. Earlier this week, it was announced a partnership between payments startup Flexa and Winklevoss twins-owned digital currency company Gemini will enable well-known retailers such as Whole Foods, Baskin Robbins, and Nordstrom to accept Bitcoin.
These are both interesting points. But are they enough to keep pushing the Bitcoin price higher?
A highly unpredictable asset
Realistically, no one knows the answer to that. What we’ve learned about Bitcoin over the last two years is that it’s a highly unpredictable asset. It can surge higher in a short period of time but it can also crash spectacularly. Where it’s going next is anyone’s guess.
What we do know is that it can’t be valued like other assets such as stocks and property, so that makes it a highly speculative investment. The price can rise 50% in a month and it can also fall 80% in a year. If you put money into Bitcoin you have to be prepared for big losses as well as big gains. And remember, if you lose 80% on an asset, you have to make a 400% return to break even.
We also know in the real world Bitcoin is highly unsuitable as a currency due to its volatility. Would you want to receive your pay or shop for goods with a currency that lost 80% of its value in a year? No thanks.
As for the argument that Bitcoin could provide protection against trade wars, it makes sense in theory, yet I’m not convinced. When stocks were plummeting in the fourth quarter of last year due to trade-war uncertainty, Bitcoin got hammered too, losing around 40% of its value over the quarter. Overall, I continue to see Bitcoin as a total gamble.
A better way to generate wealth
In my view, compared to Bitcoin, stocks continue to be a far easier way to generate wealth. The thing about the stock market is, unlike Bitcoin, it’s a proven wealth generator. That’s because, over the long run, the stock market tends to rise as company profits increase, which means if you’re willing to invest for the long term, you’re highly likely to increase your wealth.
The stock market can also produce amazing short-term returns too. For example, a £2,000 investment in online fashion retailer Boohoo just three years ago would now be worth almost £10,000. Similarly, a £2,000 investment in Ocado just two years ago would now be worth around £9,000.
So while Bitcoin has risen spectacularly in recent months, I’m not tempted to touch it. Compared to cryptocurrencies, stocks offer a far more superior risk/reward ratio.
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Edward Sheldon owns shares in Boohoo Group. The Motley Fool UK has recommended boohoo group. 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.