Bitcoin in the Midst of a Very Impressive Rally

Bitcoin

After a horrible 2018, where Bitcoin prices plunged during a massive selloff, 2019 is shaping up to be much better, and the big money is starting to pay attention now.

Given how fast the price of Bitcoin shot up during 2017, starting the year around $900 and rising to over $19,000 by mid-December, you just knew that this wouldn’t last. The fact that its price more than tripled in a little over a month late in the year also told us that we are headed for a big fall. Getting shaken off of a move like that would produce a similar climax to the downside, or worse.

Then the selling hit, and Bitcoin showed us that it’s volatility to the downside as well as the upside was unlike anything we’ve ever seen. The many who compared this to the tulip craze in the Netherlands got to see what tulip bulbs do when the craze ends, and it wasn’t pretty if you were holding Bitcoin.

It’s not hard to understand what happened during the crash. If you bought Bitcoin and held it through its rise up to the sky, it was easy to hold when it just kept going up with no end in sight, but once that ended, you had to watch more and more of your profits evaporate. $19,000 was very exciting, but just a week later this fell below $14,000, and $5,000 per bitcoin you own would be a tough pill to swallow. This was just the beginning of the pain though for those who continued to hold fast.

When something is selling off like this, the sheer momentum of the move can continue to push prices lower, as more and more people get out, in this case taking their profits before they fall even lower. We usually have some idea of how far we might fall though, with normal assets at least, where we get to the point where we reach a level of enough perceived value that the buying pressure starts to overtake the selling pressure and we see things stabilize and start moving forward again.

Bitcoin Plunged into the Great Unknown

Bitcoin brought us into a territory that was completely uncharted though, and back when it started to fall, how low it could go was anyone’s guess. In theory, Bitcoin could have gone all the way to zero because it does not have any intrinsic value like other assets do.

Cybercurrencies are unique in that regard, as every other asset is worth something. With stocks, you are buying a piece of the company’s value, and the value is usually a positive number, expressed in both present and future value. People buy stock in companies that are losing money because they see enough future value to make the stock worth to them what they paid for it, but Bitcoin actually has no value whatsoever in this sense.

All of Bitcoin’s value is purely speculative, aside from the very small value in comparison it has for exchanging money. This speculation is focused upon where the price of it may be at some future point, where we buy and hold it to speculate on this capital appreciation. That’s actually the reason people buy stocks as well, although stocks do have a backstop of sorts and there are all sorts of people who are willing to buy it at a certain price, even though that price may involve a big decline to get there.

It is not that Bitcoin could have gone to zero, but it could have dropped very near this, if demand for it just died. How far down we would go would depend on how much people would be willing to continue to speculate on it as it fell, rather than just seeing everyone head for the exits, which was possible but just not reasonable.

Unlike with the tulips, which were only worth the going rate of tulip bulbs sold for the purpose of growing flowers, apart from its speculative value, Bitcoin did have the potential for more speculation. Once the tulip craze ended, it was extremely unlikely no one would speculate on tulips like this ever again, but Bitcoin’s main purpose will always be speculation, which always at least held the promise of a comeback of some sorts.

During the second week of the crash, we actually saw the price recover somewhat, and this was a very strong sign that Bitcoin was not just going to be left for dead at the side of the road as some thought. Sure, it did fall a long way indeed from this level, but along the way we did see counter trends of various lengths and magnitudes that told us that we have a living and breathing market beneath the surface that could one day stop the fall and have us reverse.

Bitcoin Has Been A Fabulous Investment Over the Last Couple of Years

We do need to take into account the fact that Bitcoin was very much overbought in late 2017 and these things do lead to what we call corrections. When something is overbought to a level that far exceeds anything we’ve seen since people traded their farms for a handful of tulip bulbs, the correction that was coming was going to be huge as well, and it was.

When we finally did hit the bottom a year after the crash began, seeing Bitcoin fall to around $3200, all that did is take us to where we were in mid-2017, and therefore took out just 5 months of profits with an asset that had ridden a long way up just to get there. Since Bitcoin started 2017 at only $900, this still meant a very nice 2-year return of about 250% even after the correction.

The first quarter of 2019 showed us that things were really starting to show signs of stability. In spite of some news that didn’t seem to be all that favorable for Bitcoin, it handled this in stride, and the only news that really matters to Bitcoin is its price action anyway. Things were starting to look up for it though, and when it broke back through $4000, we wrote that Bitcoin was looking like it was maturing more as an asset and we should see more stability going forward. This is exactly what is happening.

Then things started to take off to the upside more, due to Bitcoin’s new maturity making it more appealing to a broader segment of investors. Bitcoin has always been an asset of the people, where the big money has stayed well clear of it, but this now looks like it is changing.

Fidelity will be launching a Bitcoin service to its institutional clients soon, and this might be the most exciting news to come to Bitcoin ever. This has the potential to expand the market for it significantly, as well as adding more stability to it. Institutions buy for the longer-term generally, and in particular, are less prone to the knee-jerk response on both sides that has driven the price of Bitcoin all over the map over the past 2 years.

Over the past 6 weeks, Bitcoin has risen by 68%. 2019 in general has been very strong as well, where we broke back through the $4000 level, the $5000 one, and the $6000 price point.

The 250% two-year return that we saw at the worst of times now sits at around 700% over two years and a third, with the promise of even more based upon its positive momentum, the room to where it was not all that long ago, and a more positive view on the street including with institutional investors.

While Bitcoin is still a very volatile asset, and still is in a class by itself completely in this regard actually, the rumors of its death were greatly exaggerated. It is now rising up off the ground, dusting itself off, and looking upon the sky once again.

Ken Stephens

Chief Editor, MarketReview.com