While a decline of 80% in any asset’s price over little more than a year may mean it offers recovery potential, Bitcoin’s slump could be the precursor to further challenges for the virtual currency.
Investors seem to be much more realistic now about its potential value. Issues such as its lack of fundamentals, the limited likelihood of it every enjoying mainstream usage and its high degree of volatility appear to have been accepted and understood by investors. And, with the general consensus among investors moving towards increased risk aversion, there may be better opportunities to make a million among assets other than virtual currencies.
Realism While Bitcoin was enjoying a period of sustained growth in 2017, many investors were becoming increasingly optimistic about its long-term potential. This is a fairly regular event in the world of investing, with it having happened numerous times in the past.
For example, in the dot com era there was a significant amount of optimism surrounding the internet and its potential impact on the way business was done. While the internet is having a major impact on the business world, it has taken far longer than was expected around 20 years ago. As such, it has proven to be an evolution rather than a revolution. Similarly, during other bull markets there has been optimism about a variety of other assets, including tulips, various commodities and, in the financial crisis, banks.
The optimism surrounding all of those assets, though, eventually gave way to a realism among investors that growth cannot continue in perpetuity. Bitcoin may now have reached that same point, with investors becoming far more realistic about its potential. Although blockchain could have a major impact on the economy, the limited size of Bitcoin and its lack of infrastructure mean that it is unlikely to deliver the scale of growth which some investors were anticipating.
Risk aversion Investors are also becoming increasingly risk averse. Fears surrounding the global economy are causing a risk-off attitude to become increasingly commonplace. The impact of this on investment decisions is to focus increasingly on more stable, less volatile assets which offer a higher chance of a return of capital. As such, the potential for investors to become increasingly bullish about Bitcoin over the medium term seems to be somewhat limited. It could even be argued that a price of $4,000 for the virtual currency is difficult to justify.
At the same time, falling stock prices could be of interest to long-term investors. High-quality stocks are now trading with wide margins of safety in many cases, and this could provide investors with the opportunity to generate high total returns in the long run. As history has shown, major stock markets have always recovered from corrections and crashes. Assets that are en vogue for a period of time, though, have not. Bitcoin seems most likely to fall into the latter category, with the stock market appearing to be a better means of making a million.
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