The surge in the price of Bitcoin in 2017 has brought the cryptocurrency firmly into the spotlight once more. It has risen to as much as $11.2k from its price of $1k at the start of the year. Various commentators are now predicting further gains. However, is buying it really the right move for long-term investors?
A changing outlook
It is perhaps unsurprising that Bitcoin has emerged as a viable investment opportunity for some investors. After all, the world is becoming more globalised and more digital. Therefore, a currency which can be used across the globe and which is intangible is perhaps not a major surprise.
But what is surprising, is the rise in its value during the course of the year. Bitcoin is not backed by any real asset, and so its value is very difficult (if not impossible) to work out. It could prove to be worthless, or it could be worth much more than its current $9.5k price tag.
Either way, the outlook for the currency looks set to be highly volatile. For example, in the last month it has traded as high as $11.2k and as low as $8k. Even after it reached its all-time high just a few days ago, it has since fallen back to that value around $9.5k. Therefore, any investor even considering the purchase of Bitcoin much accept that it could lose a sizeable chunk of its value within a very short space of time.
Since it is difficult to value Bitcoin, it is highly likely that the current bull run is speculation. History shows that bubbles such as the one which Bitcoin is currently floating around in inevitably burst. Whether that occurs this week, or further down the line, it seems difficult to imagine that sizeable further gains could be ahead. After all, it has risen 1,000% from the start of the year to its 2017 high.
Bitcoin has a history of volatility. For example, in 2013 it was priced at $13 before rising to over $1.1k during the year. However, it then fell back over the next two years to around $230. This shows that it has experienced bubbles in the past before losing momentum and falling heavily. A similar situation could occur in future - especially since many investors in the currency will now be sitting on major profits which they may wish to realise.
Of course, Bitcoin could continue to soar. It could double yet again over the next year. However, since valuation is an issue for potential investors, its risk/reward ratio is difficult to quantify. Therefore, it may be prudent for investors who are less risk-averse to seek tangible companies which also offer high potential rewards.
Unlike Bitcoin, they will be easier to value and may offer superior risk/reward ratios based on their profit growth potential, balance sheets and cash flow. As such, Bitcoin does not appear to be a once-in-a-lifetime opportunity to make a million.
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