Today we consider bitcoin, which has had “its worst ever start to the year in the entire history of crypto”, according to Bloomberg and various others.
Easy, tigers! We are barely a week in.
What’s the outlook?
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Why bitcoin is the money of the future
Let’s remind ourselves of some of bitcoin’s fundamentals, if only to calm nerves.
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Whether it’s mud tokens, coins, printing presses, long-distance communications (anything preceded by “tele”) or digital, money has been defined by technology, especially communications technology.
The latest evolution in all of this is cryptography, which will define what we use as money, even if it’s cryptographically-transferred gold or fiat currency. Crypto-money is inevitable.
Within all of that, the dominant international monetary network is bitcoin. Yes, it is losing market share – from 70% this time last year to 40% as we speak is no small decline – but it remains the dominant network. Do not underestimate the network effect.
Cryptocurrencies designed by central banks (CBDCs – central bank digital currencies) may well have a role to play in the future, but their scalability is limited by national borders. Bitcoin has no such limitation.
International tech companies are growing mightier than individual nations. Apple has a market capitalisation larger than the UK’s GDP – and we are the fifth-largest economy on earth. Only the US and China have GDPs greater than the combined market cap of Alphabet, Apple, Amazon, Facebook and Microsoft. Tech is slowly becoming our new ruler and it is made possible by its international scalability.
We will probably see IMF coins, based on a basket of national currencies, but good luck trying to organise and implement that. You just need to look at attempted international tax laws to see how difficult it is to get different governments with different agendas at different states in their electoral cycles to agree on anything. And even if IMF coins do become a thing, you then have to persuade the marketplace.
Bitcoin is already there. It has first-mover advantage, and the network effect. It is the default cash system for the internet.
As a new technology, specifically a new technology whose function is to be money, it is also highly speculative. The bull and bear cycles are not the wild swings that they were several years ago, when you would see 1,000-fold gains followed by 90%-plus market corrections.
These days, the bull cycles are more muted – doubles and triples – while the corrections are in the much more sober 50%-60% range. As the network grows and establishes, the volatility reduces.
What was the price of bitcoin in the first week of 2021? $40,000. What is it in the first week of 2022? $40,000.
I’ve suggested before that there are cycles – perhaps moods is a better word – to each of the phases that bitcoin goes through. One is the “Quiet Accumulation”; two is the “Frenzy and Blow-Off Top”; three is the “Monster Correction”; and four is the “Frustrating Consolidation”.
Between 2020 and 2021, bitcoin traced out all of those phases. What has perhaps wrong-footed many – including me – is that after bitcoin’s frenzy to $64,000 in May last year, followed by the monster correction to $30,000, we did not get a prolonged period of frustrating consolidation followed by quiet accumulation.
Instead it went straight back to its old highs, and indeed exceeded them, before another correction, though not – so far – quite as harsh as the one that took us to $30,000.
What’s next for the bitcoin price?
The areas of support and resistance are quite obvious: $40,000 is an area of support – roughly where we are now. If that doesn’t hold, then $30,000 comes into play. Failing that, the old high at $20,000 is the next line.
Bitcoin is a risk-on asset, so if central banks, and the Federal Reserve especially, really do start tightening and we get a liquidity squeeze, then these levels will come into play. If however, money remains easy and policy loose, then risk will be back on before you know it.
I have a core bitcoin position, but also a smaller position that I come in and out of, and I bought a little this week at $40,000. Whenever I mention my own trades publicly, the market usually sees fit to humiliate me, so that’s what will probably happen. Nevertheless I am putting some money where my mouth is – that should be good to know.
On the other hand, the upside for bitcoin remains tremendous – so much so that it would seem foolish not to have at least a small amount of exposure to it, given the potential.
So, all in all, I would say we are still in a phase of frustrating consolidation. The plethora of bad news stories across the media this week would suggest that we are reaching some kind of selling climax, but with cryptocurrencies the mistake is often to underestimate both the up and downside potential.
I’ve been buying, but I recognise this market can go lower; it can also go a lot higher.
It’s all part of the volatility of owning bitcoin. Enjoy the ride, don’t take on too much leverage and don’t look at your screens too much.
In five years time, it’ll be a lot higher – I hope.
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