The last three months have seen the price of Bitcoin decline by around 50%. While disappointing, it’s not a major surprise, since the virtual currency had recorded a similar-sized drop in the previous 10 months. Investor sentiment, it seems, has been on a downward trend since the virtual currency reached an all-time high of nearly $20,000 in the latter part of 2017.
Looking ahead, there could be further challenges for the cryptocurrency. Investors appear to be moving towards an increasingly risk-averse standpoint, while the defensive appeal of Bitcoin now appears to be very limited. As such, further falls could be ahead, which means that it may be a good time to consider other assets for the long term.
It’s difficult to see a clear catalyst which could cause a recovery in the virtual currency’s price over the medium term. There are numerous risks facing the world economy that may mean investors adopt an increasingly ‘risk-off’ attitude over the course of 2019. Potential challenges, such as the impact of a rising US interest rate on the world economy as well as a slowdown in China, could lead to a decline in investor interest in risky assets. Since Bitcoin has no fundamentals and its potential as a replacement for traditional currencies seems limited, it may be hit harder than other assets over the coming months.
Furthermore, there may naturally be less demand from investors for an asset which has been shown to lack defensive appeal. Previously, it was argued by some investors that the cryptocurrency offered lower positive correlation to the wider economy than many mainstream assets. As such, it could offer diversification benefits within a portfolio. Now, though, that argument seems to hold little weight, judging by the performance of Bitcoin in a period where asset prices in general have come under pressure.
As ever, mainstream assets such as shares and bonds could offer more favourable risk/return opportunities than Bitcoin. Certainly, they may be less exciting at first glance, but over the long run they have successful track records of delivering impressive returns for a given level of risk.
Furthermore, for investors who are looking for growth opportunities, the recent pullback in the stock market may provide the chance to invest in companies which offer high growth capacity at lower prices. There are a wide range of mid- and small-cap companies which could hold appeal for investors who have relatively low risk aversion. The FTSE 250, for example, has recorded double-digit total returns on an annualised basis since 1998, which indicates the growth potential on offer from mainstream assets.
While Bitcoin could see a recovery, the chances appear to be relatively low. On a risk/reward basis, there seem to be far better opportunities available elsewhere. As such, investors may be better off with assets that have track records of long-term growth, as well as fundamentals which enable value opportunities to be discovered.