Bitcoin broke through the $10,000 barrier this week, and it’s set hearts a-flutter across the cryptocurrency world. As I write, it’s at $10,288 per coin, up 60% since December’s low of $6,540.
What’s the prognosis now though? One crypto commentator reckons history shows Bitcoin has typically set its high or low point in January each year.
This commentator concludes that January’s $6,800 bottom might mean the price will never drop below $10k again. I don’t know why the conclusion wasn’t the other way round with the suggestion that Bitcoin might never again exceed January’s high. Oh hang on, I think I do know why!
Enthusiasts are fully convinced that Bitcoin is going to turn them into multimillionaires, and they’re looking for supporting evidence. And that leads them to overlook anything negative. It’s known as confirmation bias, which investors should strive hard to avoid. It happens with shares too — just look at all the stock market booms and busts we’ve seen.
One analyst apparently thinks Bitcoin is now on a bull run that should take it to $100,000 by the end of 2021. And that would beat investing in shares hands down.
But it’s a familiar figure, having been targeted plenty of times before. It was often pulled out of the air during the dotcom bubble at the turn of the century. “Stock X will soon reach $100,000,” they’d say. And all those tech stocks, which were supposed to make us fabulously rich, crashed and burned.
What the bulls do is base everything they say on just one thing, the price itself. Not on any underlying tangible assets (Bitcoin has none, unlike shares). Not on any actual wealth generation (Bitcoin generates none, shares are just the opposite). Not on anything else that’s vaguely rational, because there isn’t anything.
Bitcoin has even flopped in the one thing it’s supposed to be good at, being a currency. A blockchain currency sounds attractive, but more than a decade after its launch, what’s the uptake like? It’s almost non-existent. That’s partly due to the wild instability in its valuation, which is the exact opposite of what a currency needs.
You’ve probably guessed by now that I rate Bitcoin as a poor form of investment. In fact, it’s not an investment at all, it’s just a gamble on what the next sucker will pay to take it off your hands.
Compare it with putting your money in stocks and shares. Shares represent part ownership of companies. Those companies have real tangible assets, generate new wealth through their businesses, and pay real dividend cash to shareholders.
For more than a century now, UK stocks have returned an average of 4.9% above inflation per year. That’s not going to turn $10,000 into $100,000 in the next two years, though Bitcoin surely won’t either. But it could make a big difference to your wealth. And the longer your investment horizon, the lower the downside and the safer your money will be.
I reckon shares are far more likely to set you up for a comfortable retirement than gambling on a pretend currency that almost nobody is using.
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Views expressed 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.