Don't believe anyone who claims to know the ultimate fate of Bitcoin. There is a chance it becomes widely adopted as a store of wealth and a means of transacting outside of the banking system; there is also a genuine chance it becomes worthless.
For that reason, I consider an investment in Bitcoin like a non-expiring warrant on the eventual widespread adoption of Bitcoin. Unless you believe this is a possibility and want to make a bet on that conviction, buying and holding Bitcoin doesn't make much sense.
But like with any asset, there is a market, and with any market, there is money to be made and lost by trading. BTC/USD is now trading above its 200-day moving average, which is my preferred technical indicator to measure the medium-to-long-term trend.
Speculators, momentum chasers, trend-followers - this could be your cue to go long. 2019 could prove to be another Bitcoin bull market with returns in the 1000% range or more, or this could just as likely be a dead-cat bounce. Either way, I will not be missing the opportunity to ride the Bitcoin bull one more time.
What is the future of Bitcoin?
I don't know, and anybody who claims to know is selling snake oil or delusional. I also don't care to speculate on what the future of Bitcoin will be. There is an infinite number of variables at play, and the range of potential prices for the virtual currency is anywhere from zero to infinity. It seems that everybody has an opinion on the future of Bitcoin, and arguments can get emotional.
You don't need to have an opinion on Bitcoin to make money trading it. If you leave your emotions out of the trade, you're more likely to profit.
That said, it is essential to know the potential downside when trading any asset. What's important to me is that there are two long-term outcomes that I deem the most probable:
1. Bitcoin goes to zero or close to it.
In this case, either Bitcoin is replaced by a superior asset, interest in crypto assets completely fades, or there is a compromise in the Bitcoin network. Any of these scenarios could cause the liquidity of BTC to dry up and the price to approach zero.
For this reason, the only way to safely trade Bitcoin is with stop-loss orders in place or a very watchful eye on the price. Any capital deployed in Bitcoin is entirely at risk.
2. Bitcoin goes much higher than it is today.
Rampant inflation, widespread adoption, banking crises, or any number of unforeseen scenarios could drive the price of Bitcoin much, much higher. Many believe an April Fool's joke caused this recent rally.
If the next bull market is anything like the last one, speculators can expect massive gains.
Why trade Bitcoin?
Any move in Bitcoin's price is generally violent due to high volatility. Moreover, Bitcoin is known to have large moves to the upside, and this should excite trend-followers and speculators.
The Bitcoin trade in 2017 was immensely profitable and rewarding for anyone who got in early and used tight stop losses to control downside. As long as Bitcoin stayed above its long-term moving averages, traders on the long side profited immensely.
The people who lost are those who invested during the peak of the mania - around Thanksgiving of 2017 - and sold as it moved to the downside. Due to the news flow at the time and the anecdotal chatter and hype among my network, I'd suspect a lot of retail investors lost big.
On the other hand, any traders who used tight stop-loss orders likely made it out of the drawdown unscathed. Due to frequent, violent reductions in value, downside protection is critical when trading BTC. The market is remarkably liquid, and I commonly see bid/ask spreads of a penny, making stop-loss orders a relatively safe method of removing risk.
My current strategy is to hold long BTC/USD as it stays above its 200-day exponential moving average. I will be keeping tight stop losses which I will adjust based on the movement of the 200 DMA. Since my basis is below the current 200 DMA, the position is already profitable, and if I get stopped out here, I walk away with a small profit and will either deploy the capital elsewhere or wait to reenter Bitcoin when it has a favorable technical setup.
The position size is quite small at 1% of the portfolio, but as 2017 proved, even a 1% allocation in BTC during a bull market can lead to significant portfolio outperformance over the benchmarks.
I wouldn't be surprised to see Bitcoin up 1,000% this bull run or more. I also wouldn't be surprised to see it take another 90% haircut from its current price by the end of the year. The range of outcomes is infinite, and my strategy is designed to accommodate this. For anybody with an unprotected Bitcoin position, I encourage you to protect your downside with a hedge or tight stop-loss orders.
Just because Bitcoin exists, doesn't mean you have to have an opinion on where the price will go. Everybody on Wall Street from Warren Buffett to Jamie Dimon has a price target, and to me, everybody's opinion is worthless. The only person I listen to is Mr. Market, and he is flashing a buy signal for Bitcoin.
I am the first to admit that I have no idea what the future holds for the virtual currency. What history has proven to be true is that if you can catch a Bitcoin bull market, in its early or middle stages, you stand to profit.
I see the recent move to the upside as technically bullish, and the trend-follower in me has taken an interest and a position in BTC. This trade is a small part of my portfolio, and I am aware the price may go to zero, so I am protecting my hard-earned capital with stop-loss orders and following this trade with a watchful eye.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Additional disclosure: As stated in the article, I own Bitcoin.