It seems that every time Bitcoin seems like it could break out toward new highs, its price comes plunging back down.
After surging earlier this year, Bitcoin’s price is now down approximately 50% from its highs. In turn, many people are wondering if now is a good time to buy the popular cryptocurrency.
Here are some things to consider before making your decision.
Image source: Getty Images.
Multiple events that should serve as fuel for gains have failed to prevent Bitcoin’s price from plunging in recent weeks, including the following.
Stock market turmoil
The coronavirus pandemic has unleashed a wave of fear upon the global financial markets. Travel bans, school and business closures, and quarantines have been enacted around the world in an attempt to slow the spread of the disease. Investors, scared that these actions will cause the global economy to fall into a recession, have sold off stocks, leading to sharp losses in markets around the world.
Bitcoin has historically performed well during periods of stock market distress. Some people view Bitcoin as a chaos hedge, or a way to preserve and even increase their wealth when other assets plunged in value. The current market environment can certainly be considered chaotic, yet Bitcoin’s price has plunged right along with stocks. This is disconcerting, as the cryptocurrency’s ability to serve as a hedge against market turmoil is one of its most interesting use cases for investors.
To help ward off a recession and reduce the financial toll of the COVID-19 pandemic on the economy, central banks around the world have taken drastic measures to pump liquidity into the markets. While they could potentially help to stimulate the economy, these measures are also likely to deflate the value of the U.S. dollar and other fiat currencies, by increasing the amount of money available.
In many ways, this situation is exactly what Bitcoin was created for. The cryptocurrency has a hard cap on its total supply of approximately 21 million coins. By having a finite supply, Bitcoin was designed to maintain its value while other currencies lost purchasing power due to inflation. But so far, central banks’ stimulus measures have had little effect on Bitcoin’s price, and it’s unclear if they will in the near future.
Greater demand for digital payments
The coronavirus pandemic is also likely to accelerate the trend toward digital forms of value exchange. The World Health Organization is urging people to use contactless payments as a means to reduce the spread of COVID-19. Moreover, with central banks in several nations quarantining physical cash for periods of up to 14 days before releasing it back into circulation — since novel coronavirus can reportedly survive for several days on surfaces — the idea that touching cash could get you sick might lead more people to adopt digital payment technology.
In addition to a store of value, Bitcoin was designed to be “a peer-to-peer electronic cash system.” So one would think that it would be perfectly suited for the current environment. But that’s not yet true. Bitcoin’s current inability to scale effectively makes it largely unsuitable as a payments network. New technologies, such as the Lightning Network, could help in this regard, but they’re not ready for mass adoption just yet. As such, the need for more digital payment options is unlikely to boost Bitcoin’s price any time soon.
Should you buy Bitcoin right now?
For these reasons, you may be best served by waiting to buy Bitcoin until it can better fulfill its primary use cases as a store of value and means of payment. There are certainly some events that could help to drive the cryptocurrency’s price higher in the future, such as the “halvening,” which will cut Bitcoin’s mining rewards in half and reduce its pace of new coin creation. But prices could also continue to fall, so there are plenty of risks to consider if you choose to buy today.
Joe Tenebruso has no position in any of the cryptocurrencies mentioned. The Motley Fool has no position in any of the cryptocurrencies mentioned. The Motley Fool has a