The Bitcoin bust of 2018

BitcoinIf you thought investing in stocks was bad in 2018, be glad you stayed away from Bitcoin.

While stock market investors are still nursing their wounds from a down year in 2018, Bitcoin investors were devastated. The cryptocurrency has fallen considerably from the dizzying heights it reached in December 2017. As of this writing, Bitcoin has lost 80% of its value since the beginning of 2018, while the total market value of all cryptocurrency had fallen about 87%.

Part of the problem is that Bitcoin is hard to value, and its value fluctuates wildly–even worse than stocks did in December. A typical asset has a set of cash flows, and its value is driven by investors’ expectations of those cash flows. Cryptocurrencies have no cash flows. Because of this, they’re more like gold; their value is driven to some extent by their desirability and potential uses, but mostly by the cost of mining.

While there are many estimates of the cost of mining Bitcoin, most suggest that it’s close to $5,000 per coin. As of this writing, Bitcoin is valued at around $3,600 per coin. Now that it is valued below its cost of mining, there is little incentive to mine any more, which doesn’t bode well for the cryptocurrency’s future prospects.

Of course, there could still be ups and downs because there’s no good way to value the asset. Either way, it’s clear that investing in Bitcoin was a bad idea. Be glad you didn’t.

Azzad Asset Management

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