For years, promoters of cryptocurrencies like Bitcoin have touted its value as a hedge against inflation and have portrayed it as an asset that will do well in times of unrest when the stock market is selling off. Today, I want to look at the actual performance of Bitcoin over the last few weeks, and what stock market investors can learn about this asset, how it relates to the shares that they own, and why selling happens in the first place. Let’s dive in.
Bitcoin vs stocks
First off, let’s look at how Bitcoin has done this year. The cryptocurrency hit a yearly high in mid-February, when it was around $10,350 per coin (at the time this was worth around £7,970). By mid-March, the price had cratered to a low of $4,850 (£3,880) — a whopping 51% decline. This was far more than the 33% fall of the FTSE 100 over the same period. Since that low, Bitcoin has rallied somewhat — it currently trades around £5,800, but the volatility of the intervening period no doubt shook out a lot of holders.
Why then did this supposed ‘safe-haven’ asset underperform supposedly ‘unsafe’ stocks? One explanation is, of course, that Bitcoin is not actually an inherently safe-haven asset, but in fact a highly speculative one. Please don’t think that I’m taking some kind of victory lap here though. For all you or I know, Bitcoin could end up being the future of currency, as central banks and governments destroy the dollar and the pound with extreme monetary measures. But it could just as easily go to zero as investors decide it’s not worth their time. The important thing is, you don’t know, and you have no way of making a rational assessment either way. In other words, Bitcoin buyers are gambling, not investing.
Where opportunities come from
How does this relate to stock market investing? A deeper explanation of the heavy selling we have seen is that during uncertain times, overleveraged investors (professional and amateur) need to sell in order to meet their margin requirement. In layman’s terms, this means that people who have borrowed money to buy stocks need to put up more collateral (as with any loan), and to do this they need to sell whatever they can. If they own Bitcoin, they sell Bitcoin. If they own stocks they sell stocks.
It explains why, in times of panic, even great companies end up getting sold heavily. Yes, one reason is definitely that people are irrational. But I think that explanation is only part of the truth. I think it’s a little arrogant to assume that everyone else is irrational and that you, the enlightened investor, are one of the select few who is not. The missing part of the puzzle is that people can be both rational and motivated to sell. And that is where most value opportunities really come from.
And remember, when you invest in Bitcoin, you’re investing in a possibility. When you invest in a listed company’s shares, by contrast, you’re buying a part of a real business making real money and contributing to the eventual recovery.
The post What FTSE 100 stock investors can learn from the coronavirus Bitcoin crash appeared first on The Motley Fool UK.
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Neither Stepan nor The Motley Fool UK have a 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 2020