Could bitcoin still make you a millionaire?

A depiction of the cryptocurrency Bitcoin

In the last five years, the bitcoin price has moved 35 times higher. In other words, in November 2013 it traded at around $200, while today it is priced at around $7,000. Investors buying the cryptocurrency five years ago would therefore have made significant levels of profit.

Those figures, though, do not tell the full story when it comes to the virtual currency’s gains. It has traded as high as $19,900 in the last five years, with volatility being exceptionally high. With the S&P 500 gaining over 50% during the same time period, a ‘risk-on’ attitude among investors may have helped to propel the bitcoin price higher.

Looking ahead, could further gains be on offer? Or, is the virtual currency’s growth story now coming to an end?

Cyclicality

While there have been claims that bitcoin is the ‘new’ gold in terms of its lower correlation to other asset classes, the reality is that its rise over recent years has coincided with a strong bull market. In fact, the bull market of the last decade is the longest in decades, and has meant that investors have been bullish for an extended time period. Certainly, there have been periods where the S&P 500, FTSE 100 and other indices have experienced pullbacks. But, on the whole, investors have been optimistic about economic growth, corporate profitability and investment returns.

This bullishness is likely to have fuelled demand for bitcoin. Just as during previous bull markets such as the financial crisis and tech bubble when demand for high-risk stocks increased, investors have been open to the idea of buying virtual currencies. Now that the world economy faces dangers such as tariffs and a rising US interest rate, the bull market could falter. This, in turn, may decrease demand for cryptocurrencies, since investors may adopt a ‘risk-off’ attitude and instead focus on defensive stocks that have been relatively unpopular in recent years.

Volatility

As mentioned, bitcoin has experienced a highly volatile five-year time period. This looks set to continue in future, with it being exceptionally difficult to accurately predict the future direction of the virtual currency. Since it has no real-world value in terms of being a realistic replacement for traditional currencies, it is difficult to know whether it is now cheap or still expensive after its decline from almost $20,000. As such, investors buying now may experience a challenging holding period, with significant gains or losses possible in the short run.

Stock market appeal

Although virtual currencies could one day replace traditional currencies, the limit on bitcoin’s size and the regulatory risks that it faces could mean that its future is relatively uncertain. A more cautious attitude by investors may also mean that it lacks growth potential, while volatility may mean holding it is a challenging process.

Stocks, therefore, could offer superior risk/reward opportunities. Following recent falls, there could be value investing opportunities on offer across global indices. As such, making a million from the stock market seems to be a better idea than buying bitcoin.

 

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