This time last year, Bitcoin mania was in full swing. It seemed as if the crypto asset was in the papers almost every day.
A year on, and a lot has changed. The value of Bitcoin has collapsed, and the number of investors holding the asset has declined.
Cryptocurrencies no longer feature on newspaper front pages and the market is rife with analysis and speculation on what the future holds for Bitcoin and its peers.
For example, my Foolish colleague Peter Stephens recently claimed: “Investors appear to be gradually realising that Bitcoin may fail to deliver on its long-term potential in terms of providing a realistic alternative to traditional currencies.” He goes on to conclude: “It seems likely that the 75% decline in the virtual currency’s price in 2018 will not be the end of its exceptional slump.“
This seems to sum up the views of the wider investment community. However on the other hand, we have supporters of the cryptocurrency, who are still claiming that the Bitcoin price could hit $20,000, or even $50,000, in 2019.
For Bitcoin investors, these two conflicting views are not much help. They seem to suggest that Bitcoin is worth either a lot, or nothing. So what’s the right answer?
Forecasting problems
The problem with forecasts is they’re almost always wrong. No one can tell what the future holds for any asset price. As investors, all we can do is consider all of the information available to us and then make an informed investment decision.
As I’ve said in the past, the main issue with trying to place a value on Bitcoin is the fact that it doesn’t produce cash flows, so it is only worth as much as investors are willing to pay for it. The same’s true for highly speculative stocks and commodities.
Unlike highly speculative stocks, which can collapse into bankruptcy and wipe out investors, the Bitcoin price is determined by the number people using it as a method of exchange. The fact that the price hasn’t collapsed entirely tells me there’s still a number of people who are willing to try and make Bitcoin work. With this being the case, I’m not ready to write off the crypto asset entirely just yet.
Hedge your bets
That said, I’m not overly bullish on the Bitcoin price either, and I think it would be foolish to try and forecast what the currency could be worth 12 months from now. But if you already own Bitcoin, it might be sensible to hedge your bets and keep a small percentage of your portfolio in the crypto asset, with the rest invested in more traditional investments such as stocks and bonds.
Structuring your portfolio in this way will enable you to benefit from any potential upside Bitcoin might generate in the years ahead and, at the same time, protect you from a total loss if the price falls to zero.