Is Bitcoin A Good Buy
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As troubles in the traditional banking sector grow, bitcoin is benefitting, and risk sentiment has turned bullish on the once-beleaguered coin. Starting 2023 at around $16,600, the bitcoin price has risen a dramatic 70% and now sits around $26,969 as of 28 March.
One of the primary drivers of the recent rise in bitcoin price is the goldilocks market regime that appears to be developing. Inflation in the US has fallen from a peak of 9.1% in June 2022 to 6.0%, and consequently the Fed has been able to slow its rate hikes. Markets are pricing rate cuts for 2023, and this is bolstering risk assets such as equities and crypto. Crypto has also already priced in a lot of bad news recently, leaving the way open for upside moves.
Before the early 2023 bull run, bitcoin was having a miserable time. This was due to several events, both crypto-specific and part of the broader macro backdrop. You can see the current BTC price on the chart below and its historical progress through 2022.
Moreover, there are ongoing fears that the effects of high inflation and rising interest rates will plunge the world into a recession. Our recession probability indicator remains over 70%. Bitcoin is yet to experience a serious global recession, but we expect one would limit any potential upside in price action. This is because during times of economic uncertainty and weak growth, investors may be more inclined to sell risky assets like bitcoin and seek safer investments such as government bonds.
One exercise is to see how low prices could get were the NASDAQ to suffer a 2000-style crash. After all, earlier in 2021, the bitcoin and NASDAQ correlation reached highs of almost 80%. So where the NASDAQ went, bitcoin followed. The correlation has declined recently, but should it rise again, the historical drawdowns of NASDAQ could be informative.
Back in 2000, the NASDAQ suffered a 78% drawdown. As of November 2022, the NASDAQ is in a 27% drawdown. A repeat of the 2000-style drawdown would put the NASDAQ at 3,500. So where would crypto be if NASDAQ were trading at this level We estimate a regression between bitcoin/ethereum returns and NASDAQ returns from 2020 onwards. Based on this relationship, we find:
We think bitcoin is a worthwhile long-term investment. However, we also note that bitcoin is extremely volatile. That means it experiences large price movements over short periods. Before investing, you must understand the risks involved: you could lose all or a large portion of your investment. Never invest money that you cannot afford to lose.
However, to invest in cryptocurrency, we must first understand it. Crypto tokens are unlike any traditional asset class. And they are all different. Just because you understand bitcoin, does not mean you know how ethereum works. Our video on bitcoin fundamentals can help you understand how bitcoin prices fluctuate and how to assess trends in important bitcoin metrics.
We suggest paying attention to the long-term macro backdrop when asking yourself, should I buy bitcoin right now Your exposure to bitcoin needs to be appropriately sized so that you can survive 50% to 80% drawdowns. Drawdowns provide good entry levels for exposure, but we would not go max long in an environment of rising central bank rates and falling global growth momentum.
For trading bitcoin over the next two to four weeks, we are slightly bearish. That means we expect falling prices. However, we think bitcoin is a good long-term investment for the next one to three years and are bullish overall. That means we expect prices to rise in the long term.
As with all investments, the value of bitcoin can rise as well as fall. While it is unlikely that bitcoin will suffer a complete loss of value, investors must be prepared to suffer drawdowns of between 50% and 80%. We recommend small allocations and diversification of your portfolio. Never invest what you cannot afford to lose.
Traditional wisdom says you should buy low and sell high. But whether you should sell bitcoin depends on your investment horizon, risk appetite and financial goals. Although some websites speculate that certain days of the week are better or worse than others for selling bitcoin, we believe that any decision to buy or sell should be based on an analysis of crypto fundamentals.
Smart contract platforms: after bitcoin, the big innovation was to have blockchains that were more programmable. These could host smart contracts or decentralised applications and have allowed the emergence of the metaverse and defi. Ethereum (ETH) is the most popular version of a smart contract platform. As well as ethereum, we also include some key competitors. The constituents of this index are: Ethereum (ETH), Cardano (ADA), Avalanche (AVAX), Solana (SOL), Fantom (FTM), VeChain (VET), Terra (LUNA), EOS (EOS), and Chainlink (LINK). We also include Polkadot (DOT) which allows interoperability between blockchains and the use of smart contracts via parachains.
Early investors in cryptocurrencies such as bitcoin will probably have made money. If you had spent 310 to buy one bitcoin in April 2016, six years later your investment would have been worth about 24,000. Past performance is not an indicator of future results.
While that 18,620 value for one bitcoin is far more than its price of 310 in April 2016, the price fluctuations for even the most popular cryptocurrency highlight the extreme volatility of crypto investment.
More of them are investing in cryptocurrency than ever before, and investment banking giant JP Morgan Chase advised in February 2021 that investors could consider putting 1% of their investments into bitcoin as a way to diversify their portfolio, according to financial firm Bloomberg.
Baked into the bitcoin code is the promise that no more than 21 million units of bitcoin will ever be created. So instead of being an inflationary currency like sterling or dollars, some experts argue bitcoin is the opposite: it is deflationary, increasing in value with the passing of time.
Of course, the deflationary argument in favour of bitcoin falls down if governments decide to regulate specifically against it. India, for example, has proposed a ban on cryptocurrency trading, suggesting it will impose fines on anyone caught holding onto digital assets of any kind.
On the other hand, where price movements of stocks and shares may well be influenced by the performance of the business, bitcoin has no underlying asset. This means that the movements in its price are based purely on speculation among investors about whether it will rise or fall in future.
As a result, there can be violent swings in the price of bitcoin, even in the space of 24 hours. Over the last year, high inflation and a cost of living crisis are causing people to reduce their investment risk by selling their cryptocurrency, which indicates that the value of crypto can be influenced by inflation.
Graphic details: From left to right, Bitcoin miners discover unique blocks of numbers, known as hash, to add to blockchains. By approving these blocks and adding data to the blockchain, miners are rewarded with bitcoins.
For ledger entries to be successfully added to a blockchain, all computers on the network must agree that the entries are accurate. If they all agree, the ledger entries are added and a cryptocurrency such as bitcoin is issued as a payment.
Bitcoin miners are gatekeepers to the blockchain technology, approving transactions and preventing fraud. By approving blocks and adding data to the blockchain, miners are rewarded with bitcoins. This reward offsets the costs (computer hardware and power consumption) associated with approving blocks.
The first bitcoins could be mined with one guess. The odds today of guessing the correct hash for a bitcoin are 1 in 17.5 trillion. This is why massive computing power is needed. Miners are trying to maximize the amount of guesses per second to discover correct hashes before other miners. Large groups of shared computing power are known as mining pools, and these mining pools account for the majority of cryptocurrency-mining activity.
Bitcoins cannot be bought or sold directly, unless you buy the cryptocurrency directly from the owner. They are usually purchased on exchanges, such as Coinbase, where users can exchange currencies or other cryptocurrencies for Bitcoins. Purchases are usually for fractional shares of a bitcoin.
Bitcoin appears to trace previous bubble patterns. After rising more than 1,300% in 2017, bitcoin began 2018 with a precipitous decline, losing over half its value in the first month of trading. Bitcoin's rise in 2017 far surpassed previous bubble peaks, such as the dot-com bubble of the late 1990s and the recent U.S. housing market bubble, and bitcoin's rapid recent decline are tracing the decline patterns of those bubbles as well. While predicting the near-term or even long-term direction of bitcoin is impossible, we believe extreme volatility is likely to continue.
Cryptocurrencies are not common stocks of companies and do not trade on stock exchanges. Unlike an investment in a stock or mutual fund there are no underlying fundamentals (cash flows, profits, tangible assets, etc.) to support their valuations. The uncertainty this creates has led to extreme volatility in cryptocurrencies such as bitcoin, ethereum and litecoin. Other risks include price manipulation by unknown market participants, the potential for government interference, and competition from other cryptocurrencies. The SEC and other financial regulators have recently issued letters warning investors of these risks. 59ce067264