- Bitcoin is up about 40% since my last review, and I plan on holding that position as I anticipate more gains.
- The sector has seen the launch of the first Bitcoin futures ETF, which has renewed interest in the broader crypto universe.
- This remains a volatile asset, so investors need to prepare themselves for big swings in both directions. As such, it is not appropriate for everyone.
- This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »
Main Thesis / Background
The purpose of this article is to discuss the merits of Bitcoin as an investment at the current market price. This is an alternative investment I entered in to with a small position, but monitored carefully, and decided to add to back in August. Since that time, I have been well rewarded, with Bitcoin rising almost 40% since my last article, to over $61,500 at time of writing:
As was the case in August, I wanted to take stock of my position. Specifically, given the volatility of this asset, I wanted to see if it makes sense to bank some profit here, or if letting it ride (or perhaps adding) is the best option.
After review, I actually think a bull case for Bitcoin is still present here. While the cryptocurrency saw a major drop the last time in traded in the $60K-range, I see this level as more sustainable going forward from here. The reasons are multi-fold. There are more ways to invest in Bitcoin than ever before, with the recent launch of a Bitcoin ETF, which should bring in a wave of new investors. There is growing interest by corporate America, with increased coverage and investment options, which should increase the legitimacy of the sector. Finally, inflation and debt continue to rise and rise, which make fiat hedges as relevant now as they ever were.
What Has Caused The Recent Surge?
To begin, let us take a look at some of the reasons for the strong gains Bitcoin (as many crypto assets) have been enjoying. One major development was the launch of the first U.S. Bitcoin ETF, the ProShares Bitcoin Strategy ETF (BITO), which fanned enthusiasm and pushed prices to new all-time highs.
This is not a pure play on Bitcoin, as the fund holds Bitcoin futures contracts, which are bets on the future price of the asset. This is not a strategy I personally would favor for retail investors, but the fact remains, it is a relatively cheap and easy way to gain exposure to Bitcoin. It is sure to bring in a rush of new buyers, and is likely driving some of the gains we have seen recently. The support is two-fold. More investors are interested in the space, and more investors are trying to front-run that interest by buying in. Both are bullish for Bitcoin.
Other developments have been increased institutional interest in the space. This comes about as more companies are investing directly in the asset, and also increasing their coverage of it at the request of clients. For example, Bank of America (BAC) published its first research coverage focused on cryptocurrencies and other digital assets earlier this month, finally joining other financial institutions who have gotten more involved in crypto. The press release gives more details. In other news, U.S. Bancorp (USB) announced it launched a cryptocurrency custody service for institutional investment managers who have private funds in the United States and Cayman Islands, therefore giving them more options.
And that is just domestically. When we look outside the U.S., we see interest is picking up in emerging market countries. As reported by Reuters, the Salvadoran government recently bought roughly $25 million more Bitcoin this past week, which President Nayib Bukele announced on social media.
My takeaway here is that the momentum remains on the side of Bitcoin, as crypto as a whole. This tells me that while Bitcoin is re-testing its previous highs, there is plenty of support for remaining optimistic.
Global Debt, Inflation Give Merit To Hedges
Beyond these micro-events, there are broader macro-developments that could lend merit to Bitcoin. This is relevant for crypto, as well as numerous other hedges investors could use. What I am referring to is rising inflation, which is not only an American phenomenon, but a trend we are seeing around the world. Readers are likely well aware that prices have been rising here for just about everything, whether it is gasoline, food, or consumer staples. But, again, we are not alone with these pain points. Consider the following graphic, which shows the rise in prices in a number of diverse areas:
Source: Yahoo Finance
Clearly, prices are on the upswing, but the bad news is that there is probably not going to be any relief until at least early 2022. In fact, governments in the developed world are getting interest rates at rock bottom levels, and are also considering massive spending programs (think the "Build Back Better" plan).
This reality means that an inflationary environment is likely to persist. Compounding this, is the fact that U.S. and global debt levels are already at "nightmare proportions", to quote Gordon Gekko. To illustrate, consider that non-financial debt as a percentage of GDP has risen to unprecedented levels in both the U.S. and the rest of the world:
Source: Morgan Stanley
The takeaway here is that global currencies are continuing to get devalued. Governments and corporations are borrowing hand over first, and this is sending inflation higher and making investors increasingly nervous. As long as this story remains intact, and it absolutely will in the short-term (and probably long-term), hedges like Bitcoin are going to draw in dollars.
Bitcoin Remains Volatile, Be Prepared For Swings
Now a word of caution. While I do have a favorable opinion of Bitcoin at the moment, let us not forget this is not a risk-free asset. Quite the contrary. This is an investment that is prone to wild swings, steep gains, but also steep losses. If we look at where we stand now, Bitcoin looks like a no-brainer. It is re-claiming the upper-end of its range, and has performed very well over time. Yet, if timed the wrong way, losses can be severe. Yes, if you hold, the gains would have worked out in the end. But not everyone has the stomach to hang on to investments that are losing a lot, very fast.
To see why this is a concern, as I write this piece on Thursday night, I am reminded just how relevant this volatility story is. After trading closed this afternoon, Bitcoin saw wild evening action, dropping by $3,000 in mere minutes (before ultimately rebounding):
Source: Yahoo Finance
I want to use this as a reminder that readers should only enter this investment option if they are can afford to take some losses, mentally and financially. This sector has historically had a lot of volatility, and that is not likely to reverse any time soon. So, to reiterate, investors should approach this space with caution, and to put in cash they can afford to let ride when the inevitable down days occur.
Alternative Crypto Investments Could Take Away From Bitcoin
My final point touches on another area that readers should follow closely. This is the growing size and scope of the crypto universe. In fairness, this has been generally a positive for Bitcoin, as it has made the broader sector more approachable, interesting, and diverse. As a result, you may have people looking at other crypto assets, and deciding to take a plunge into Bitcoin as well.
Of course, the opposite is also true. As alternatives become more available, you could see investors who would have previously chosen to invest in Bitcoin choose a newer or flashier crypto to try to front-run the next big thing. And this is no small risk, as the size of the crypto market has grown, so too have the alternative options. To illustrate, consider that the number of constituents in the broader crypto index has grown by about five times (from 50 to 250) in just over a year:
Source: S&P Global
The conclusion here is that Bitcoin is not even close to the only game in town. While a viable option for the reasons I mentioned, there is a plethora of ways investors can play this space. That could mean interest in Bitcoin could wane over time, if other options gain popularity.
I doubled down on my small position in Bitcoin this past August, and the result has been very favorable. I was tempted to take the profit and run here, but I still see a path forward for more gains to come, so I am going to hold on to my stake. Inflation metrics and debt levels mean that dollar currency hedges are very relevant, and the launch of a new Bitcoin ETF is sure to draw in a new wave of investors in the broader crypto space.
Of course, risks remain. This is still a very volatile asset, so it probably isn't right for everyone. In fact, for even those that are willing to take the gamble, a small position is probably most appropriate. Further, the crypto realm keeps on growing, which could pull assets away from Bitcoin and into the newer entrants. Time will tell on that front. Despite these headwinds, I remain optimistic on my Bitcoin position, and encourage readers to continue to give this asset some consideration at this time.
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This article was written by
I began my career in financial services in 2008, at the height of the market crash. This experience has shaped my investment strategy - which is focused on diversification, dividends, and growth opportunities. I am a competitive tennis player, and I competed at the Division I level in undergrad. I have a Bachelors and MBA in Finance.(He is a contributing author for the investing group CEF/ETF Income Laboratory where he specializes in macro analysis. Features of CEF/ETF Income Laboratory include: managed income portfolios (targeting safe and reliable ~8% yields) making use of high-yield opportunities in the CEF and ETF fund space. These are geared toward both active and passive investors of all experience levels. The vast majority of holdings are also monthly-payers, for faster compounding and steady income streams. Other features include 24/7 chat, and trade alerts. Learn more.)
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BTC-USD either through stock ownership, options, or other derivatives. 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.
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