The fall in the value of Bitcoin since the latter part of 2017 has been astounding. Having reached almost $20,000, it now trades at around $3,800. That’s a fall of over 80% in just over a year, and suggests that investors are becoming highly dubious about the prospects for the virtual currency.
While a recovery cannot be ruled out, the reality is that things could get worse for investors in Bitcoin. Weak investor sentiment, various risks facing the world economy and the increasing appeal of other assets may mean that now is the right time to sell, rather than buy, the cryptocurrency.
According to some investors, one of the reasons to invest in Bitcoin is its potential lack of correlation with the wider economy. It was argued that it could provide diversity to a portfolio, and may enhance an investor’s return potential while also diversifying risk.
This has not proven to be the case. Bitcoin’s price level is determined solely by demand and supply. Since investors have become increasingly concerned about the prospects for the world economy, their risk tolerance has declined. This has meant that demand for riskier assets such as the cryptocurrency has fallen, and the price of Bitcoin has dropped significantly.
With a number of risks facing the world economy, it would not be surprising if the trend of investors moving towards increased risk aversion continues in the coming months. Events such as a rising US interest rate, a slowing of growth in China and the potential for a US-China trade war could lower demand for riskier assets. And since the virtual currency is one of the most volatile mainstream assets around, its future prospects do not appear to be positive.
Since investors appear to be turning increasingly risk averse, buying shares in companies with lower positive correlation to the wider economy could be a smart move. Industries such as healthcare and tobacco are likely to see resilient demand compared to more cyclical industries. They may therefore be able to offer robust growth at a time when the prospects for a range of sectors is uncertain. And if global growth expectations are reduced, investors may gradually be willing to pay a premium for defensive stocks.
Of course, just because a company is defensive does not mean that it lacks growth potential. A growing world population which is also ageing is likely to mean that demand for a range of healthcare services and products is set to increase in the long run. Likewise, the tobacco industry is experiencing a significant change which is likely to see reduced-risk products become increasingly mainstream. This could catalyse growth over a sustained period of time.
While Bitcoin may seem to be appealing as a recovery play following its 80%+ fall since the end of 2018, the reality is that there appear to be far better risk/reward opportunities available elsewhere.
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