What is driving the price? When will there be a correction? Will the “moon” dreams finally become a reality? Should I sell? Should I buy? Will the futures crash Bitcoin, or the whole market? How is this even possible?
These are all valid questions addressing investor concerns about the recent explosion in Bitcoin price. In just 6 months, Bitcoin has gone up approximately 500%, of which 300% has happened in the last 2 months alone. Just yesterday, the price was sitting at $12,500, which today has already passed $18,000 on most exchanges.
This should lead any investor to question the basis of this mysterious rise, especially since the bull run has no tangible foundations aside from, arguably, the Lightning demo. However, even that was so overshadowed by the constant memes and blind hype that realistically we can expect nothing other than a major correction happening soon.
In what sense is Bitcoin a bad buy right now?
My perspective might be considered controversial by many, but hear me out. The reason why I believe buying Bitcoin right now is financial suicide is not based on my feelings, or whether I want to be right or wrong, but rather is based on my perspective of risk-reward. With every massive growth driven by speculation and hype, as opposed to value creation, there is a far greater risk associated with purchasing than there is with selling. You might want to ask yourself: is it more likely for Bitcoin to grow 100% after going up from $3,600 to $18,000 without a single hiccup, or is there a higher chance of it consolidating by dropping 50% after an approximately 500% run-up.
I would argue that the latter has much higher probability of playing out, as the massive bull run occurring right before futures are launched might not be a consequence. I understand that we would all like to believe that Bitcoin is facing mass adoption and that negative interest rates coupled with hedging against banks and government control is the cause of all of it, but the reality might be different, at least right now. All those hopes are still instilled in us, and it is not a crime to believe in it. But when we look at where Bitcoin was one month ago and where it is now, not much has changed in terms of the value it provides and by what it is defined – it is simply not in that mass adoption phase yet that would justify such an increase in price.
Shorting and institutional money
The second question you might want to ask: why would you, as an investor looking at Bitcoin charts right now, NOT want to short the current market situation – the rise is extremely unhealthy and unsustainable. If you look at the volume, the price is driven more by small orders and “FOMO” buying, rather than institutional money – the big boys have most likely already exited and are waiting for the possibility for easy access to shorting. Keep in mind that institutions and investors with large capital and experience make money both ways; they don’t particularly care whether Bitcoin rallies or falls, since either way they make money. Why would they just sit out the correction and wait for the next run-up when they have a chance to make even more money shorting the ridiculous rise? They don’t care about “hodling” or investing in fundamentals. All their fundamentals are based on greed and emptying the pockets of the little guys.
Taking all of that in mind, I would argue that Bitcoin and some other cryptocurrencies are arguably in a significant short-term bubble due to, but not limited to, the following reasons:
1) Accessibility of Internet and information, which produces and snowballs mass hype
2) Accessibility to uninformed investing for younger demographics and regular working people
3) Amount of institutional investing taking advantage of unregulated markets
In terms of investing, Bitcoin has the strongest raw emotion behind it of any of the trade currencies, which can move the market very rapidly and hence cause high volatility. This means that if price starts surging, there are a lot of hyped-up people buying into it, and when the price starts dropping, a lot of panic will cause mass-selling.
What does future hold for Bitcoin?
Please note that in no way am I stating that you should avoid Bitcoin, nor that we are facing a long-term bear market – the catalyst for that has not set in yet (which might not be the case if Bitfinex and Tether bring down the market – however, this is a discussion for another day). What I am saying is you might want to consider the risks associated with this short-term situation of the market. Nothing goes up in a straight line forever.
I would also like to address why I referred to “buying” Bitcoin in the current market, not “holding on to your investment”. Well, it is quite simple really – when you are an investor that does not care for fluctuations in price and have a strong belief in the foundations of Bitcoin, then a bear market for a couple of months is probably of no worry to you, especially when you have been holding throughout the most difficult times in Bitcoin history. I still believe that Bitcoin is one of best innovations ever created, with the capability of tackling a variety of problems, such as hyperinflation, negative interest rates, government control, bank corruption, financial crisis, failing economies, etc.
Maintain sober head and acknowledge risks when investing!
Keep in mind that there’s nothing shameful about sitting out periods of uncertainty or hedging against your investment at some point, which is why you should not pressure others into making the same decisions as you do, nor should you shame the people selling their Bitcoin. Yes, Bitcoin will likely correct, but there is a lot of basis to believe that it will continue in an upward trend after the major correction, but in a more stable and value-driven way. Or I could also be completely wrong and Bitcoin could rise even more, but that is not the purpose of this article and not the key takeaway. What is important and what you need to ask yourself is this:
Is the potential upside of the current market situation worth the possible downside when buying right now, and what is the probability and implication of each to your portfolio and life?
All in all, personally I don’t see buying Bitcoin right now as an informed decision based on positive risk-reward, but rather a decision based on gambling and speculation. Rewards in investing should be driven by stability and probability, not by hype and fear of missing out. Happy investing, and best of luck with the upcoming wild roller-coaster ride, whatever the outcome!