Most stock investors (myself included) have often been very cautious when looking at investing in Bitcoin. For one, the volatility is incredibly high, with daily jumps of +/-10% not uncommon. Further, in the past it had all the hallmarks of a bubble, whereby mass euphoria took over the retail sector and the price was pumped higher and higher until the bubble burst.
The above is all true, but that does not mean that we should discount Bitcoin completely as an asset. After all, the stock market has exhibited signs of being a bubble in the past (think early 00’s with the dot-com crash) and yet we do not write it off as a terrible way to invest funds.
At the moment, there are two reasons I think Bitcoin deserves a further look.
An uncorrelated safe haven?
With some in the market flagging concerns about the potential for a stock market crash or global recession, you could look to allocate a portion of your portfolio to Bitcoin to help you diversify your assets.
Historically, safe havens such as gold and the Swiss franc have appreciated during times of uncertainty. We have not seen a strong positive correlation between gold and Bitcoin; however, this year during stock market corrections (a correction being a significant fall in prices but not as severe as a crash) we did see Bitcoin rally.
For example, during early August, the FTSE 100 index fall around 6%, and at the same time Bitcoin rallied from $9,500 to $11,800. This is not an isolated example, and so there does appear to be merit to owning Bitcoin as a shelter against other asset classes falling.
An intrinsic value?
One of the reasons many investors shy away from Bitcoin is that they struggle to put a marker on what the fundamental value of a Bitcoin is. Various ‘experts’ have tried to put a price on it, with values ranging from $1,000 to $500,000. The main difference I can see in these valuations is the future projection of how useful Bitcoins can be in society as a means of cashless integration and a store of value.
I do not claim to be an expert in this matter, but I do know that the large banks and financial institutions are pushing hard towards digitization. Other firms too are trying to embrace cryptocurrency (even the likes of Facebook are developing a currency). This leads me to believe that whatever the intrinsic value of a single Bitcoin is now, it is only going to increase in value over time.
Overall, as mentioned above, I am firmly in the camp of treating Bitcoin stories of quick riches with a pinch of salt. But returns do not lie – if you had invested £1,000 into Bitcoin at the beginning of the year, you would have almost doubled your money.
Therefore, taking time to look at a fair value you would be happy to give Bitcoin, and looking at putting a portion of funds into it for an uncorrelated class to the stock market, is not a bad idea, in my opinion.
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Jonathan Smith and The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019