Bitcoin: I'm Cautious But Bullish

I don’t know about you, but I find it funny that bitcoin’s drop from close to $20,000 to around $8,000 is once again being used by some as evidence that the virtual currency is essentially worthless. We should keep in mind that those like Vanguard's Chief Economist, who say that bitcoin “going to zero” is a distinct possibility, are usually the same people that said that BTC/USD at $200, $500, $1,000, or at any other level on the way up was also ridiculous and unjustifiable.

They were wrong then, and they are wrong now.

That is not to say that we couldn’t head lower, but for those who are familiar and comfortable with the exaggerated volatility and risk inherent in crypto markets, now is a good time to start cautiously averaging back in.

If we ignore the notion of going to zero and look at bitcoin’s price history, the reality is that, as ARK Investment Management’s CIO Catherine D. Wood says in this article on Coindesk, even the bear case being made around bitcoin is essentially bullish. It is only a few short years ago that when I wrote articles like this, essentially arguing that bitcoin was a buy at around $250, I was often accused of being somewhere on the “wacko fringe.”

At that time, the bear case now being made for bitcoin at around $1,800 to $2,000 looked ridiculously bullish.

At some point in the future, if governments around the world recognize the threat that peer to peer currencies pose to the power that they derive from issuing currency, it is quite possible that the market for bitcoin and other crypto-currencies will be marginalized to some degree. For now though, that doesn’t seem to be the case. Most governments, true to form, are more intent on ensuring that they can derive tax revenue from bitcoin than anything and attempts to regulate the market are being made with that as the focus, thus allowing bitcoin to find its market value.

Based on what we have seen in other markets recently, it is quite possible that that value is higher than current levels or will be soon.

The surge in Treasury yields and the steady decline in the dollar that have now prompted a large correction in stocks were all essentially about one thing, the fear of inflation. That fear looks even more justified now that Congress has passed its latest budget-buster to go with massive tax cuts. If the politicians involved were the heads of any corporation or household and proposed a big spending increase to go with a huge cut in income they would rightly be seen as insane.

I will concede that the government’s ability to tax in the future and the Fed’s ability to create money out of thin air make government debt unique, but still, irresponsibility general has a price and hypocrisy has a way of coming back to haunt you.

A large part of the appeal of bitcoin is born of the understanding that politicians have a tendency towards both of those negative traits. They are all fiscal conservatives in opposition, but many change their tune when in power and start to advocate for giveaways in taxes and spending that they believe will buy them short-term popularity: thus the sight of Democrats who were very concerned about the effects of a big tax cut on the deficit now arguing for more spending to go with it.

Even more hypocritical are the whole host of Republicans whose main criticism of the previous administration was fiscal, even as the annual deficit declined, now advocating for the largest deficit increase since the recession just when it is needed the least.

As depressing as that is, it is essentially good news in the long term for the holders of assets that act as inflation hedges, including bitcoin. The short-term dynamic driving prices may be more technical than fundamental, but if nothing else the possibility of a return to inflation points to the absurd nature of the “going to zero” argument.

As I said at the top of this piece however, caution is still warranted and only those with a big appetite for risk and who can afford to lose should even consider cryptos. Now that traders rather than believers dominate the market more volatility looks certain, but the support seen at around $7,000 this week makes this a logical level to resume buying for those that fit the criteria.

I wouldn’t go all in on BTC/USD at these levels but beginning to average in around here makes sense. I am therefore, based on history and current circumstances, once again a cautious bull.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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