Bitcoin: Don't Be Mistaken, It's Still A Risk Asset But.
Deep Value, Growth, Momentum, Contrarian
Seeking Alpha Analyst Since 2016
Engineer turned value investor and researcher.
Worked as an engineer in the semiconductor industry in the field of design and characterization. Fell in love with business analysis and stock analysis in 2016 and became an eternal student.
I focus on long-term and income-generating investments. Occasionally, I use options to hedge or start positions.
Summary
- There are major differences between the Crypto hype of 2017 and the current hype that's occuring.
- Bitcoin is a store of value, but it doesn't react the same way Gold does and that's obvious when looking at the positive correlation to the stock market.
- Bitcoin's price goes parabolic when the stock market does well for an extended period of time.
- Investors with a long-term investment horizon should have a look at Bitcoin, but don't blindly buy into it.
I am long Bitcoin (BTC-USD) and hodled it since 2015. I sold a majority of my position in 2017 at a very good price. I dollar-cost averaged my way back into bitcoin when it was at around $8000 earlier this year.
My investment time-horizon for Bitcoin is 3-5 years, in which I will eventually increase my position at appropriate prices.
Summary
The stock markets positive sentiment provided the playground for investors to look for riskier assets with higher returns like Bitcoin. That played a major role in the increase of Bitcoins price at the beginning of 2020.
The crypto market is more mature than in 2017. Bitcoin hovers around 60% of total crypto market capitalization, while the next few crypto assets are also major players like Ethereum (ETH), Ripple (XRP), or Tether (USDT).
Bitcoin is not like Gold, and it will take more time and much more market capitalization for that to happen. Thus, while Gold shows a negative correlation with the stock market, Bitcoin positively correlates with it.
Bitcoin can be part of a diversified long-term portfolio with an investment horizon of 3-5 years. Investors can dollar-cost average their position into Bitcoin and use dips (that will certainly occur) to strengthen their position.
The difference to the 2017 hype
In 2017 a lot of alt-coins and ICOs influenced the market dynamics. At the time, we didn't measure wins and losses in percentages anymore but in Xs.
"Today, I made 15x with this coin."
Today there are some movements in the alt-coin market, but not nearly as much back in 2017. The picture below shows the total market capitalization of the crypto market back in 2017.
Bitcoin reached nearly $20k in December of 2017, but on the way to that price, many altcoins reached very high market capitalizations. In August 2017, Bitcoin Cash had the highest market capitalization for a very short period of time.
In 2020, we don't see the same market behavior. It looks a bit more.. mature.
It's mostly Bitcoin conducting the total market capitalization. That's also why we are at a total market capitalization of $570 billion instead of nearly $750 billion back in 2017 when Bitcoin was at a similar price.
Bitcoin is not like Gold... yet?
Gold is a safe haven for investors and the general public. It has been for centuries. Bitcoin is not at that point yet. Some say that Bitcoin will never be like Gold since it has no intrinsic value or physical embodiment.
I disagree with the whole, "Bitcoin has no intrinsic value." Especially taking into account the broad definition of "intrinsic value" that others use. It's not yet fathomable that a not state-initiated digital algorithm can have intrinsic value for most people. But, we are paying for algorithms, software, and other digital goods daily. So why can't an algorithm have an intrinsic value? But this is a topic for another time.
Gold has an inverse correlation with the equities market, as can be seen in the picture below. This strengthens the argument that Gold is an asset that investors use if the stock market is not doing too well.
Bitcoin, on the other hand, has a positive correlation with the stock market.
Source: Bloomberg.com
Bitcoin follows the positive sentiment of the stock with a certain delay. If the stock market builds up momentum, and investors start getting comfortable, they tend to look for riskier assets and higher returns than the stock market could provide.
Source: tradingview.com
The picture above shows the DJI on the upper chart and the Bitcoin price chart below from 2016 to 2018.
The stock market was in a long and steady upward trend, and Bitcoin's price positively correlated with the stock market sentiment.
In mid-2017, the crypto market started heating up, and its upward trend was completely disconnected from the stock market. Bitcoin's price and that of the crypto market went parabolic.
Let's get to 2020.
Source: tradingview.com
Above, you see Bitcoin's price chart next to the DJIA and Gold price in 2020. We can clearly see the negative correlation between Gold and the DJIA and the positive correlation between Bitcoin and the DJIA.
In mid-October, Bitcoin's price sentiment disconnected from the stock market, very similar to what happened in 2017. Bitcoin's price went parabolic again and reached near all-time highs just a few days ago.
Conclusion
Is Bitcoin's price currently too high?
Probably.
Should a value investor have a stake in Bitcoin?
Certainly.
Bitcoin should be part of a well-diversified investment portfolio, but one should not just blindly buy it at any price.
When looking at Bitcoin with a long-term view of 3-5 years, it certainly makes sense to dollar-cost average a position into the cryptocurrency. There will be stronger dips that enable investors to build their position Bitcoin.
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I always welcome constructive criticism and open discussions. Please feel free to comment or PM me about my calculations and/or sources that I use in my articles.
Analyst's Disclosure: I am/we are long BTC, ETH.
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