Buy the Bitcoin Dip?

With the recent decline in Bitcoin from a peak of $64,899 down to $32,959 as of this writing (a 49% decrease), is this the beginning of the end of Bitcoin or a tremendous buying opportunity?  I think it's a buying opportunity.  Bitcoin has had drawdowns of this magnitude before in bull markets and it's fairly normal for this asset.  Furthermore, we are not anywhere near the peak of this market cycle based on my research and past bull market behavior.  While there will definitely be a sell-off after Bitcoin reaches its new cycle high (there are many estimates ranging from $100K to $500K), the bottom that is established after the "blow off top" should be significantly higher than where it is trading now, based on past history.  New investors to the space, however, are certainly alarmed by this and will feel a strong urge to sell especially if using borrowed funds.  I don't recommend using leverage at all in crypto, stocks or gold - only use cash you can afford to put away for a while.  My own observation is that there seems to be a lot of leverage (futures) chasing Bitcoin on the way up and down in this market cycle, which seems to have increased the volatility.  However, if your strategy is to simply buy the dips and hold onto it for the long term (even better to put it in a hardware wallet offline and "out of sight, out of mind"), you should be very happy.  Despite all the ups and downs, Bitcoin has returned on average a 200% annual return for the past 10 years.  Given Bitcoin's verifiable scarcity (21 million coins maximum), supply is immutably fixed forever.  Demand will fluctuate with the market and adoption of it as an investment, store of value and potentially a medium of exchange.  Over the long run, as adoption grows, the demand will follow and the price will inevitably rise.   Any market will follow a life cycle and Bitcoin is no exception, as shown in the chart below:

I think the market for Bitcoin has moved quickly to pessimism, but we are still in a bull market as discussed previously, which is a pretty good setup.  If you are a long term investor, the market cycles mean less to you because you are holding on for the long term.  If you invest regularly and hold in almost any market (gold/silver, stocks, real estate, etc.) you will most certainly make a good return over time.  Bitcoin offers something different than almost any market and the closest comparison is to gold.  Bitcoin has many advantages over gold, not the least of which is the ability to easily and for relatively low cost store and transfer vast amounts of wealth that would be impractical with gold.  One Bitcoin chart I like to follow is the so-called "stock to flow" model.  It's an incredibly accurate predictor of the price of Bitcoin.  While the price can be very volatile and fluctuates above and below the flow line, it always comes back to it.  Every four years the next Bitcoin bull market kicks off with a "halving" when the reward for Bitcoin miners to process blocks successfully is cut in half, thereby reducing the new supply that is coming on the market from miners.  Eventually, say in 50 years, all the new Bitcoin will have been mined when the issued supply reaches 21 million coins and miners will be rewarded only through fees for transferring Bitcoin (which by then should be fairly lucrative assuming broad global adoption).  The stock to flow model predicts a price of $100,000 for Bitcoin this year.  With recent price action, it's certainly not difficult to see why many new investors find that hard to believe, while the more seasoned Bitcoin investors are still "buying the dips."

One thing to note is that over time and amid all the huge swings, the price of Bitcoin has risen steadily, giving rise to the 200% average annual rate of return and Bitcoin almost always ends the year higher than it started.  True, that sometimes Bitcoin trades sideways for a while in between bull markets, but there's no question about its historical performance.  Now, some may say "the easy money has been made" in this asset and that you can look forward to lower returns going forward.  With an immutably fixed supply and so many demand drivers, here are several reasons why I don't agree with this:

• Global currency debasement (money printing) is unlikely to stop given extremely high debt levels and need to continue to stimulate economic growth; this will continue to inflate all assets and Bitcoin is a theoretically perfect hedge to this activity, with an immutably fixed supply and superior features as discussed previously to other similar assets like gold and silver

• Institutional adoption of Bitcoin in investment portfolios continues to grow

• Corporate adoption of Bitcoin as part of Treasury function continues to grow

• Crypto ecosystem is in early stages of development and continues to build on the base of Bitcoin and while some projects like Etherium are interesting and maybe worth a speculative allocation, cannot compete with Bitcoin's decentralization, stability and security

• Bitcoin is the largest network by market capitalization, has the most mature technology, enjoys the "first mover" advantage and has a powerful network effect (Metcalf's Law)

• Traditional financial services companies including banks are realizing they need to get on board or be disrupted by crypto

• Individuals, especially the younger generations, are demanding crypto for investing, earning returns and for transacting

Some have also said that if the government bans Bitcoin, then what?  It's interesting to note that China has "banned" Bitcoin many times in the past (and recently), but a decentralized global monetary protocol is impossible to ban.  You may be able to control the on and off ramps back into fiat currency, but the technology that holds and transfers the value is beyond the control of any one person or government and continues to work 24 hours a day seven days a week.  In the end, governments will want to collect their taxes on trading and transactions, so it's in their best interest to welcome Bitcoin and other crypto assets into the financial system to 1) be able to regulate the activity and 2) collect tax revenue.  Regulation and paying taxes is nothing new - same holds true if you invest in stocks, bonds, gold/silver, real estate or anything else.  Frankly, I think the industry could benefit from some regulation particularly around scams, pumping and dumping activities on social media and the like (mostly around the so called "alt coins").  What about illegal activity?  Well fiat currency has been used for a lot more illegal activity than Bitcoin historically and the combination of regulation and the open, transparent blockchain, use for illegal activity should be able to be curtailed as much as it has been for fiat currency (i.e., not much).

Another common complaint is that Bitcoin doesn't adapt to new use cases like the other crypto assets and as such will get "left behind" as the rest of the industry evolves.  I view that more as a feature than a flaw since we are talking about your hard earned money.  Who wants to put money into something that can change at a whim of one person or a few at the top?  Bitcoin is really good at one thing and that's keeping your money safe from currency devaluation over the long term and being able to store it and move it as necessary.  In time, you'll be able to borrow against Bitcoin much like real estate and you can use that money for whatever your needs are without having to sell and incur a tax liability.  That day could come in the next 10 years, I think.

All of these negative narratives can be categorized as "Fear, Uncertainty and Doubt" or FUD for short.  They have all come up before in the past decade since Bitcoin's inception and they will continue in the future.  The crypto boat has sailed and many investors, including the younger generation of investors, understand it and are embracing it.  This will continue to drive adoption and innovation in the space.  Many traditional financial services businesses including banks will be massively disrupted by the changes happening here and the smart ones will change their business models and work with regulators to embrace the change or risk being left behind.  Probably the best examples of this type of adaptation are seeing traditional automakers like Ford and GM fully commit to building electric vehicles - they have seen the success of Tesla and the writing on the wall from investors interested in ESG, governments looking to reduce carbon emissions and ultimately what their customers are demanding.

Finally, as I wrote about in my post last week here, while there are opportunities in gold and silver to invest with some potential upside, the stock market is clearly over valued and seems likely to correct in the next few weeks or months - the higher it goes, the more likely (and possibly more significant) the correction, especially with unprecedented amounts of margin debt outstanding.  Rather than piling in to the stock market, why not buy Bitcoin when everyone else is selling it?  In summary, while the short term price action can be disconcerting, when Bitcoin dips, I think it's an opportunity to buy and hold for the long term. 

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2021.  To see all my books on investing and leadership, click here.  

Stay safe, healthy and positive.