Is Bitcoin a Dying Asset, or is it Simply Maturing?


Bitcoin has taken quite a beating in the markets, and the CBOE is now planning on delisting it. The media continues to pound it, but things may actually be looking up.

To hear Barron’s tell it, in an article just released called “Bitcoin’s Blight Deepens,” you would think that Bitcoin is being left on the side of the road to die, especially after the CBOE has decided to delist it after the expiry of its current contract expires in June.

They of course reference the fact that it has lost 80% of its value, and mention that financial advisors are crowing even louder about telling investors to steer clear of this back when the cryptocurrency’s prices were shooting toward the moon. We’re also told that bitcoin is in the biggest slump in its 10-year history, with trading volumes “on a long and steady decline.”

The Wall St. Journal piles on by telling us that “bitcoin is still largely driven by momentum, and right now it doesn’t have it.”

This is a perfect example of how you can color an issue, or at least try to, based upon how you can selectively present the facts on it. It is not that bitcoin’s road has been a smooth one by any means, and even when it was climbing, everyone knew well the risks involved, and especially if this was invested in with no controls, being frozen to act as bitcoin’s price plummeted as fast as it rose, but times are actually changing.

There were a lot of people who cautioned against bitcoin as an investment when it was on the way up, and even as the buying frenzy continued, we were told that the end is still nigh. After rising so much, we were actually pretty much guaranteed to see a big correction, as this momentum wasn’t based upon anything but momentum, and there was nothing to stop it from tumbling as much as it did.

Whether or not we could have just jumped on this train and got off and joined the mob in selling when that finally hit wasn’t discussed, and still isn’t. There is only one option that ever comes to mind with these people, to go long and stay long with a stiff upper lip, which obviously was an even more terrible idea here. We also aren’t told of the fortune we could have made once it did sell off, but these advisors really don’t know very much if anything about trading, so we wouldn’t have expected that anyway.

Bitcoin is as Far from a Buy and Hold Investment as You Can Get

When you take people who make their living making rather pedestrian recommendations on the long side only, over the long term, on very mature assets, and you throw them into the bitcoin arena, a game that is as literally as distant from their standard fare as you could possibly get, we really have to question what expertise these folks have here to advise anyone. Investing in crypotocurrencies is way too far from home to ever fit their approaches to investing, or for that matter, those of many of their clients.

To say that traditional, conservative, buy and hold investing and bitcoin trading are two different animals is quite an understatement actually. To traders though, bitcoin trading isn’t fundamentally different, other than the fact that cybercurrencies have been in a class all by themselves as far as nominal volatility goes.

Unlike investors, traders love volatility, and normally use leverage to increase it a lot on purpose. For instance, with trading futures, where the rules of the game even involve just putting up a small deposit on the assets you control, this is seen as a big benefit. When you do that with an asset as volatile as bitcoin, this can be dangerous if not handled properly, but the amount of leverage you use even with futures trading can be completely controlled.

Those who bite off more than they can chew here do get punished, but that’s always the case regardless. What we do need to realize, first and foremost, is that bitcoin trading is nothing like long term buy and hold investing, and in fact takes the shortcomings of the lack of risk management that so-called conservative investing is guilty of, and magnifies it incredibly.

The rise and fall of bitcoin have been nothing short of a trader’s dream, at least as far as the potential of these trades go, and the only real challenge is to come up with a plan that allows you to ride these big waves while still managing risk well enough. This cashes out to damping risk to keep you in on the right side of the moves without being knocked off the wave.

We do this with position sizing, and it’s not even whether or not you want to be trading this, it’s how much you want to be trading, provided that you know what you are doing. Traders simply take on the appropriate position sizing to manage risk well enough, and then can then stay in for the rises to the sky and stay on the short side for the drops off the table if they wish, and we’ve seen plenty of both with bitcoin.

This is not a game that your average investor should ever think of playing, although a lot did. Some did make a lot of money, others may have lost a lot, but most of them did not have a real plan here and saw bitcoin as more of a gambling play, laying down their money and taking their chances, which isn’t particularly well advised to be sure.

Bitcoin Actually Looks Like it is Maturing More Now

Bitcoin is actually on a course to mature as a financial asset lately though, something you won’t be aware of if you just look at the highs and where it is now, and conclude that it is tanking and leave it at that. It sure did go down a lot, but has also really stabilized, and has actually traded pretty close to the major stock indexes over the last 3 months.

Bitcoin bounced off the low last December, and is up 25% from there now, almost mirroring what has happened in stocks. We’re not sure why this qualifies as a slump, let alone the biggest one in its 10-year history. We’ve even broken through $4000 again, and while this isn’t really that meaningful, these so-called psychological levels are at least watched and acted upon by some.

Volume is also not declining, and it’s actually picked up over this period, where we’re seeing about twice as much volume and interest since the relative doldrums we saw last fall. Sure, today’s volume levels are nothing like what we saw during either the crazed move up or the crazed move down, but that’s to be expected, and these more reasonable volume levels are another sign of the asset maturing.

The CBOE is indeed planning on delisting bitcoin, but once again, only part of the story is being told. The CBOE was the first futures exchange to list bitcoin, but since then, their rival futures exchange CME has joined the game. The CME has no plans on delisting bitcoin, because they have now won the lion’s share of the bitcoin futures market, and will now inherit the rest as their competitor bows out after accepting defeat.

Bitcoin is of course heavily influenced by momentum, and in fact is solely driven by it. This may not be something that those who seek more tame investments are going to like, just like bitcoin traders will not like the conservative approaches that these investors prefer. Bitcoin has thus far been completely unsuitable for traditional investing, where the importance of timing your investments properly becomes magnified greatly, so those who do not have the means or desire to time investments certainly are way out of their element and in fact will take on far more risk than it would ever be sensible to take without any real direction or plan to manage it.

Things are changing on this front though, and while we may not ever get to the point where bitcoin becomes something you could just buy and hold with no regard to risk management, like people do with stocks, that’s not a very good idea with stocks either, although a far worse one with bitcoin.

Bitcoin looks like it may have finally made it to the more mature stage three, with stage one being the rise and stage two being the fall. Both took us very much into unchartered territory, but we have seemingly drawn the maps a lot more here, provided that we can at least stay above the lows of last December, and bitcoin may actually be growing up quite a bit lately.

Andrew Liu


Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.