By Parke Shall
Bitcoin has seen its first boom and its first bust already. The digital currency rose to over $2600 last week before crashing down to about $1900, where it sits today. Here's what the last week looked like,
Coverage continues to be binary. As the price appreciated, people took to the press and hyped up the price action. As the price declines, people on social media and in the financial media make it seem as though all is lost and the price will eventually go to $0.
Putting the hysteria aside, all we are seeing are the mechanics of volatile supply and demand driving the price of an asset. If bitcoin had been around for 30 years and we were seeing price swings like the ones we are seeing now, we would really be concerned. However, the fact that new individual buyers and sellers are being introduced to the digital currency everyday in significant numbers leads us to believe that these giant price swings are nothing more than growing pains for the digital currency that are compounded and catalyzed by the media.
We have been getting a lot of grief as an article we wrote last week talked about moving beyond the $2700 mark for bitcoin. It was that very same day that the price topped out and began to fall. Had we been advocating for a short-term trade, we would be dead wrong. But the fact is that we've always had a multiple year outlook on bitcoin and we have even advocated for simply buying one and forgetting about it.
Before everybody gets on our back about writing a bullish article last week while the price was at $2700, we think readers and potential investors should remember that we were one of the few that advocated for buying bitcoin on the dips after the BITFINEX exchange was hacked some months back. Even at the $1900 level we are at today, the price has still more than doubled since then.
In addition, we wrote our "Buy One Bitcoin" article while the price of the digital currency was at $1400. Those who purchased at that level have still recognized gains of about 40%.
Why are we an advocate for possibly buying the dip here? A couple of reasons.
First, we already stated that we thought this price action was simply a product of bitcoin being a new asset trying to find its footing.
Second, we anticipate the success of bitcoin to become "official" in other countries aside from Japan. We wrote last week that a very large contributor to the price appreciation thus far over the last couple of weeks has been the acceptance of bitcoin as an official currency in Japan. We expect that other countries will follow suit and that the credibility from these moves will not only drive the price higher, but will prompt new participants to buy in the open market.
Third, the public is only still figuring out now how to buy bitcoin. The reason that the GBTC bitcoin trust is trading at a 100% premium a lot of the time is because average investors don't really understand the means with which to acquire bitcoin.
We think that only a small portion of the population has had access to the digital currency and that once real demand comes in, coupled with bitcoin's finite amount of supply, that the natural trend will be for continued price appreciation over many years.
The point is that every time bitcoin has "crashed" over the last couple of years it has been a dip buying opportunity. Every time there has been some volatility in the price, the narrative turns to whether or not there will be a loss of confidence in the asset that will eventually lead it to go to zero. Some of these arguments are correct in that confidence does play a large role in the pricing of bitcoin. However, we don't see this confidence fading anytime soon, especially given the recent adaptation of the currency in major countries like Japan.
Of course, any Bitcoin investor must be wary of three caveats we pointed out during our last article:
- The first caveat investors need to be aware of is the fact that bitcoin is reliant upon digital infrastructure in order to be transacted. In other words, you need to have some type of device with an Internet connection and a bitcoin wallet to be able to transact the currency, and in the case of a sizable disaster or catastrophe, investors may not have access to their holdings and may not be able to transact their holdings. This is why we also recommend gold as a hedge against "the system" and actually against bitcoin as well.
- The second caveat investors need to be aware of is the fact that bitcoin is still relatively illiquid and this causes sharp price movements for the digital currency, which often is volatile to the tune of far more than 20% over the course of a 24-hour period. Investors need to understand that all capital invested in bitcoin is at risk of being lost and that bitcoin still remains a very speculative investment vehicle.
- This ties into our third caveat, which is that no doubt hackers are working overtime to try and figure out a way to disrupt the bitcoin landscape. It has happened so far several times over the last couple of years and will likely happen again. We have commented in the past that we didn't think the effects of these hacks would be profound and we can be fairly confident in saying the same for the future. However, one can never be certain.
While we may not go out and add aggressively to our holdings here, we do believe that if you are looking for a spot to enter into the bitcoin market for the first time that this pullback may represent an opportunity for those with a multiple year longer-term focus.
Disclosure: I am/we are long BITCOIN.
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.