The price of Bitcoin has been on a rocky ride over the past 12 months. After surging to nearly $20,000 at the end of last year, the value of the cryptocurrency plunged to less than $6,000 over the summer, and has since levelled out at around $6,500.
Trying to predict where the price will go next is difficult because the underlying value of Bitcoin isn’t possible to determine. Over the past 12 months, the value of the cryptocurrency has been established by supply and demand or, to be more specific, the demand by traders and speculators who have been looking to profit by betting on the asset’s value.
Finding a value The biggest problem I see with trying to determine the ultimate value of Bitcoin is the nature of the cryptocurrency. For it to gain recognition around the world as a transfer of value, owners need to be sure the coins they hold in their wallets are not going to lose value suddenly overnight.
This is why adoption of the cryptocurrency around the world has been so sluggish. Over the past 12 months, its value has whipsawed making it almost impossible to use Bitcoin on a day-to-day basis. However, over the past two months or so, the price has stabilised, which is good news as it should mean that more people start to use Bitcoin as a transfer of value.
That said, it’s believed that a large percentage of the Bitcoins currently in existence are owned by just a few individuals which, if true, is concerning. The market is still mostly unregulated, and these individuals could easily manipulate the price if they own enough of the cryptocurrency.
So, even though the price of Bitcoin is now more stable, the dark side of the industry may stop it from ever becoming a widely accepted unit of currency.
Limited market Still, as there are only ever going to be a certain number of Bitcoins in existence, it’s reasonable to assume that the asset will have a terminal value. Trying to determine this value is not easy, especially with a large percentage of the market concentrated in the hands of a few significant holders.
The price of Bitcoin could fall to below $10, or rocket to more than $1m if it becomes a widely used unit of currency. If lawmakers decide to clamp down, it could be worth less than $10, or even zero. This is not as unrealistic as it first sounds, because reports suggest crypto assets have become the currency of choice for the criminal underworld, allowing gangs to circumnavigate the traditional banking system.
The bottom line Put simply, trying to forecast what the future holds for the Bitcoin price is almost impossible and, with this being the case, I am avoiding the asset altogether.
However, considering the potential upside on offer if Bitcoin takes off, and if you’re comfortable with the level of risk and volatility that comes with the asset, it might be worth a long-term punt.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no 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.