Is Bitcoin the ultimate recovery play?
The Motley Fool
Published Dec 16, 2018 13:05
Updated Dec 16, 2018 13:45
The last year has been a ‘sea of red’ for the Bitcoin price. After coming close to reaching $20,000 in late 2017, it has fallen dramatically to trade at less than 20% of that price today. Investors, it seems, have become increasingly unsure about its prospects, with demand moving lower during a similar timeframe to stock prices experiencing a prolonged correction.
Falling asset prices can, of course, present recovery opportunities. In fact, turnarounds can offer attractive risk/reward ratios due to investors having adequately factored in the risks which may be ahead. As such, could Bitcoin now represent a buying opportunity?
Track record The virtual currency’s fall in price may be disappointing, but it is not unprecedented. It has a track record of exceptionally high levels of volatility, which until now have always been followed by a recovery. For example, having risen to almost $1,000 by the end of 2013, it proceeded to fall to just over $200 by the start of 2015. By the start of 2017, however, it had returned to $1,000 and then proceeded to rise almost twenty-fold to hit an all-time high by the end of the calendar year.
This shows that the virtual currency’s past has been filled with volatility, uncertainty and disappointment at times. Investors who are bullish about the prospects for a recovery will point out that it could take time for the cryptocurrency to mount a successful comeback, but that it has always been able to achieve this in the past.
Differing circumstances The reality, though, is that Bitcoin has benefitted from one of the longest bull markets in decades. It was created during a challenging period for the world economy, but in recent years it has benefitted from investor sentiment being extremely bullish. Just as during previous stock market booms, investors have become increasingly ‘risk-on’ and this has led them to be more open to new ideas which could deliver high returns in a growing world economy.
Now, though, the outlook for global GDP has deteriorated. Protectionist policies implemented by the US and China could slow down global GDP growth over the medium term. Likewise, a rising US interest rate may introduce an element of caution into investor psyche. This could cause demand for riskier assets such as Bitcoin to remain low. Since its price is based on demand and supply, rather than any fundamentals, it could therefore move even lower if investors become increasingly risk averse during the course of 2019.
Get The App
Simple solution While seeking to buy an asset after a price fall can prove to be a sound idea, there may be much better recovery plays available than Bitcoin. Global stock markets may remain under pressure in the near term, but they could offer long-term buying opportunities as a result of wide margins of safety and growing profitability being on offer. As a result, buying Bitcoin now may not be a sound move compared to the turnaround prospects of a variety of stocks.
Written By: The Motley Fool
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.