If you are a Bitcoin investor, Santa arrived way before Christmas for you. It seems he is still around, pouring in gifts, and wants you to get a new pair of socks.
Rhetoric aside, Bitcoin’s meteoric rise has put people in a frenzy to buy. Those “hoddling” are either cashing out at this moment or putting their last dime into it, hoping it’d go all the way to the moon.
What’s causing this phenomenal rise? How are you – a wannabe investor and probably a first-time buyer – supposed to react? Jump onto the bandwagon? Or wait for the price to retrace?
Let’s unpack all these questions.
Why the sudden jump?
Covid-19 scared away potential investors in the crypto space, but they came back as soon as a sense of normalcy returned.
The quick recovery shows the sentiment behind Bitcoin and altcoins remained strong. Add to this the market switching between intermittent bearish modes and moving sideways all through the last three years and the FOMO crowd finally getting a chance to buy at the dip to understand why a spike was likely.
A 900 percent increase
But in all honesty, does a 900% jump make sense? It does if you throw institutional investors into the mix. Yes, that’s the difference between the current spike and the early 2018 bull run. The previous bull run stirred up ripples, but failed to expand the market beyond retail investors.
This time it’s different. For the reasons below.
The bond-buying nightmare
Fed is doubling down on QE despite America’s national debt reaching an all-time high of $27 trillion. Their indiscriminate buying of securities is an alarming sign for all retail investors holding US treasuries.
The graph below shows the extent of this madness.
The promise of liquidity is a double-edged sword. Those invested in corporate bonds and mortgage-backed securities are learning it the hard way. Fed has turned bond-buying into a total nightmare. I personally won’t be surprised if panic selling begins all of a sudden.
Bitcoin is inflation proof
In a time when consumer inflation is a headache for central banks across the world, investing in something that’s deflationary because of its very design is a sensible move.
The graph below is a comparative analysis of inflation in recent years.
The rate of increase in 2020 monthly inflation surpassed all previous years except 2016. Cumulative monthly inflation accelerated mid-March onwards, but even before Covid, it was inching towards the high of 2016.
Bitcoin has its own upward and downward spirals, similar to other financial instruments, but that’s due to supply and demand – two most predictable market mechanics. Central banks announcing bailout packages couldn’t make it subject to inflation risks. It’s the key reason investors are seeing it as a safe haven asset.
New bunch of investors
We have a motley crew of investors getting into Bitcoin circa June 2020. Some prioritize Bitcoin over yellow metals because they understand the logic of deflation. In 2020 alone, Fed printed 34% of all the US dollars currently in circulation. In contrast, Bitcoin is going to have a supply-side crunch very soon as only 14% of coins are left to be mined.
Then there are investors like Michael Saylor, who moved $421 million into Bitcoin last year. He has both the expertise and financial wherewithal to engineer a better form of cloud mining. His peers are going for an even bigger and riskier kill – ASIC financing.
They are causing retail mining profitability to hit the ground. The hashprice is the highest in recent time, $0.31/Terahash/day to be precise, but compare it to figures from three years ago, and this is how it looks;
Needless to say, large companies investing in ASICs are bearing losses. But they are okay with losses as long as the anticipation of Bitcoin touching the one million mark is strong.
This, in my opinion, is far better than buying from an exchange. They may be wasting processing power worth millions, but no fiat money is getting converted in the process. Fiat is losing value all over the world, and a fraction of that value is passing over to Bitcoin whales. But these investors are actively preventing fiat’s eroding value from dribbling into the coffers of the whales and keeping it all to themselves.
Should you invest now?
Assuming you are in for the long haul, I’d tell you to wait. At the time of writing this article, Bitcoin is trading at $38K, with a whopping 11.81% increase over the last 24 hours. It was extremely volatile a week ago, but now it’s less volatile after finding support at 32000-34000 level.
Bitcoin dropped from the all-time high of $42K after the US dollar recovered from its three-year’s low. The DXY index was up 1% against major currencies early this week, followed by promising job data and gains in treasury yields.
The USD might continue to gain strength ahead of Joe Biden assuming office on January 20. Biden’s policy proposals will set the tone for its future appreciation or depreciation. So, wait till the middle of February to get a clear picture of which direction the US dollar will go.
In the absence of clear policy guidelines (no bailout packages for small businesses, no reopening of the economy), the USD will tank and those holding treasury bonds will jump ship. That’d be the right time to invest. Alternatively, if Biden manages to lure institutional investors back in, Bitcoin will drop again. In that hypothetical scenario, you gotta wait till it finds support and then enter as soon as it crosses the first resistance.
If you are a positional trader, a fresh momentum started a few days ago. I am guessing that by the time I am done with this article, it’ll be over taking Bitcoin to $40K. Wait if you failed to buy at the recent support and only enter when the selling pressure coming from those who purchased near the 32K level is over. The target should be the recent high of $42K.