Buy The Dip On Bitcoin

By July 4, 2019 Bitcoin Business
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Summary

Bitcoin contains qualities that make it a theoretically superior form of money.

Technical analysis suggests we are entering a fourth parabolic advance.

Increased institutional interest could be the catalyst for this next rally.

Why buy Bitcoin in the first place?

This section attempts to prove that Bitcoin is theoretically a superior form of money, giving credence to the Bitcoin maximalists that claim it’s a revolutionary product. The two most important functions of currencies are as a store of value and medium of exchange. The accessibility and digital infrastructure around paper currencies makes them an excellent medium of exchange but a poor store of value unless backed by gold, silver, or another commodity. Without an anchor, central banks can create money without checks and balances, leading to steady monetary depreciation. The image below shows the exponential rise of inflation in the dollar since 1971, providing a visual representation of paper currency debasement.

(Source: Monetary Regimes and Inflation, p. 11)

While paper currencies serve as a superior medium of exchange but a poor store of value, gold is the opposite. Gold has held its value on a relative basis for over 5,000 years. However, for proof that gold is a poor medium of exchange, try paying for groceries in antiquated gold coins.

Another domain to think about the gold, dollars, and Bitcoin comparison is in the digital vs. scarce spectrum. Roughly 92% of the world’s dollars are digital, but dollars contain no scarcity, as central banks can, and do, create money as a tool of monetary policy. With a diminutive amount of gold mined each year, gold contains scarcity but not the digital infrastructure of dollars.

This is the theoretical need that Bitcoin fills. No more Bitcoins will be mined after $21 million, making it a scarce asset not subject to steady depreciation. While the price per coin fluctuates greatly in these early innings of adoption, its scarcity prevents long-term depreciation to the extent of paper currencies. Additionally, as a digital asset, one can send Bitcoin instantaneously to another wallet, making it a better medium of exchange than gold.

Since my first blog post in August 2018, I recommended placing 5% of one’s investable assets in Bitcoin or a basket of cryptocurrencies. As a superior form of money, Bitcoin has potential to steal market capitalization away from gold investors and forex traders. Bitcoin may gain traction as an alternate store of value and remain relegated to that niche. Even so, if Bitcoin had a lowly 5% of the market cap of gold, the price per coin would be $25,000. This is due to its meager $215 billion market cap compared to $6 trillion of gold. Bitcoin may become an entirely new asset class with tradable ETFs, mutual funds, and central banks holding a portion of their reserves in it. In which case, the price per coin could easily reach levels above $100,000. Bitcoin could also go to zero in the event of a governmental or regulatory blockade. For these fundamental reasons, I believe Bitcoin is a high-risk, high-reward investment that every investor should consider.

Why buy now?

After its recent advance, Bitcoin has retraced 55% of its June rally that saw it skyrocket from $7,432 to $13,880. In total, the price retraced 30.5%. While this volatility is stomach-churning for some investors, a 30% retracement is rather mild given corrections in the 2015-2017 Bitcoin rally. Of the eight large retracements during that rally, the average correction moved -31%.

(Source: Peter Brandt, Factor LLC)

Additionally, Bitcoin moves in multi-year parabolic waves, and evidence suggests we are entering the fourth parabolic advance. Of the five times that Bitcoin has crashed in price, the average retracement equaled 86.2% as seen in the chart below. The crash from the December 2017 high equaled 84.2% before tripling in price. It’s safe to say that the Bitcoin bear market is over. The question now becomes, how far can Bitcoin go?

(Source: Peter Brandt, Ibid.)

If the trend of swift parabolic advance and crash continues for a fourth time, we are just now entering a Bitcoin bull market that can take the price per coin to $100,000 or higher. The least that Bitcoin has moved in these parabolic runs is 119x, which occurred in the 2015-2017 bull market as shown below. A 32x move to $100,000 per coin is rather mild given the fervor of past bull markets. The channel that captures Bitcoin’s long-term price action also sees $100,000 as a reasonable price target as seen in the second chart below. Lastly, several catalysts exist on the horizon that could easily bring institutional money into Bitcoin and catapult the price per coin.

(Source: Peter Brandt, Ibid.)
(Source: Peter Brandt, Ibid.)

Future catalysts

Bitcoin has advanced largely on retail investor interest. However, the catalyst for this next rally will likely be the integration of institutional investors. Facebook’s (FB) Libra, though technically a Bitcoin competitor, is a win for the cryptocurrency market, as Facebook will need to begin an educational campaign to entice its 2.5 billion users. However, given the company’s track record with user data, I do not believe Libra will share Bitcoin’s respect for privacy. In harsher terms, it’s foolish to think that Facebook will not track transactions made on the Libra network and sell that data to digital advertisers.

From November 2018 to February of this year, Fidelity Investments conducted a survey of 441 institutional investors, including hedge funds, pensions, financial advisors, and more, in order to determine their interest in cryptocurrencies as an asset class. They determined the following:

“47% view digital assets as having a place in their investment portfolios. 32% see them as part of an alternative asset class, while 15% believe they have their own independent asset class. Among the 47%, 72% would buy investment products that hold digital assets, 57% would buy crypto assets directly, and 57% would buy investment products that hold crypto companies.”

Institutional investors have followed through with this renewed interest. The holding distribution chart below shows the spread of Bitcoin holdings between retail investors, institutional investors, and crypto exchanges. Accounts of large firms have seen an increase by 4% of total holdings from 2018 to 2019. Add anecdotal instances, such as Square (SQ) accepting Bitcoin deposits and Fidelity soon becoming a Bitcoin custodian, and the path for Bitcoin becomes clear.

(Source: Data Driven Investor)

Conclusion

This article provided the fundamental reasons for why to buy Bitcoin, how much of it to buy given its volatility, and rough price estimates based on technical analysis and levels of institutional buy-in. Given the evidence that we are now entering a fourth parabolic advance, I believe now is a suitable time to buy. Even if this parabolic advance never comes to fruition, Bitcoin has a meager market capitalization and should increase in price, even if it remains relegated to a digital gold niche.

Disclosure: I am/we are long BTC-USD, ETH-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Bitcoin contains qualities that make it a theoretically superior form of money.

Technical analysis suggests we are entering a fourth parabolic advance.Increased institutional interest could be the catalyst for this […]

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