Since the start of the year, the Bitcoin price has risen by around 175%. That’s a superb return over a relatively short time period, and shows that the virtual currency can deliver high growth in a short space of time.
Looking ahead, though, there continue to be significant risks facing the cryptocurrency. Regulatory risks, its limited size and an evolving currency market could hold back its progress, while its lack of fundamentals may mean that investing in the stock market offers a superior risk/reward opportunity over the long term.
With Bitcoin lacking any fundamentals that make it possible to ascertain its value, it is wholly reliant on demand and supply among investors in order to determine its price. This means that investors are unable to accurately decide what it is worth, which could lead to it being severely underpriced or overpriced at the present time.
In terms of its future prospects, Bitcoin’s limited size may mean that it is unable to eventually replace traditional currencies. Alongside the prospect of regulatory changes among lawmakers and its limited infrastructure, this may mean that it ultimately fails to become a mainstream currency. This could cause investor sentiment to weaken, which may have a negative impact on its price.
Furthermore, with there being rival virtual currencies, investor interest in Bitcoin could realistically wane over the coming years.
Of course, further price rises for Bitcoin cannot be ruled out. The cryptocurrency’s risk/reward opportunity, though, may not be as appealing as that of the stock market. In fact, the FTSE 100 and FTSE 250 both appear to offer good value for money at the present time, which suggests that they may be able to outperform the virtual currency over the long run.
Although both indexes have histories of bear markets, they have also always recovered from their challenging periods to post new highs. This should provide investors with confidence in their future prospects, since there is a high chance that they will recover from future downturns. This could equate to highly appealing buying opportunities during periods when stock price valuations suggest there is a margin of safety on offer.
Due to Bitcoin’s lack of data regarding its value, as well as its limited track record of recovery, investors may not have the same amount of confidence in buying the cryptocurrency following a price fall. Ultimately, this may mean that they are unable to ‘buy low and sell high’, as is the case with the FTSE 100 and FTSE 250.
In terms of Bitcoin’s future price prospects, it appears to be exceptionally challenging to determine how high, or how low, it could trade in the coming years. Due to this, as well as the appeal of the stock market, investors may be better off buying a range of mid and large-cap shares due to their superior risk/reward ratios.
Doing so could mean lower growth over the short-term, but may equate to higher long-term returns that come with less risk.
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Motley Fool UK 2019