As I woke up this morning I read a headline that Bitcoin reached $11,000 USD for the first time – shortly afterwards it crashed 20%!
It’s fascinating to watch how quickly cryptocurrencies are evolving, but to be honest I don’t really understand them and cannot predict how things will ultimately play out (I have not met anybody who can). However, whether Bitcoin is the ultimate winner or not, I have no doubt the blockchain technology on which it is built, will be revolutionary.
One of the biggest limiting factors preventing Bitcoin becoming a mainstream part of the economy is the price volatility. In the past, there have been instances where Bitcoin has fallen 85% or more. Such massive swings in price make it impossible to have confidence in it as a store of value like traditional currencies. The same limitations apply when trying to view cryptocurrencies like Bitcoin as an asset class for investment – too unpredictable.
Researchers at the CSIRO identified four factors influencing the price of Bitcoin. These are media coverage, political uncertainty, external regulation, and governance. In short, the Bitcoin price is determined by sentiment and speculation, much like the price of gold. Gold is considered an asset class for investment so why not cryptocurrencies? The main difference is that gold is physical and has not changed in thousands of years. Yet cryptocurrencies are digital, and new ones are constantly being created, while the old ones like Bitcoin are still evolving.
So how could cryptocurrencies become a viable asset class in an investment portfolio? The real test could be if they held value or increased during a substantial shock to financial markets that caused a market meltdown. This would certainly catch the attention of investors that might see cryptocurrencies as a diversifying asset like gold. However, judging by how quickly money has gone into Bitcoin this year alone, I suspect it would leave even quicker during a panic – its no safe haven!
Cryptocurrencies are still in their infancy and my only prediction is that things will continue to be volatile and ‘driven by speculation. If you are planning on getting into Bitcoin, treat it as if you were going to a casino and don’t buy more than you can afford to lose.
As for me, I don’t gamble or invest in things I do not understand, so I’m happy to sit it out and watch from the sidelines.
Rob Gilmour is the Managing Principal of Wealth Simplicity, where it is about living life to the fullest and having no regrets!
The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.