Crypto Has Crashed: Is Bitcoin A Buy Or Sell? (BTC-USD)
Why Has Crypto Dropped?
Bitcoin (BTC-USD) has been crushed over the past few months after hitting its all-time high in November. Unlike this summer’s selloff which had some concrete reasons behind it (China banning BTC, high-profile ESG concerns, etc.), this time around the explanations are more abstract and generally revolve around liquidity, the Fed, and retail investors cashing in.
I think most of us as investors understand that there’s tremendous value in a global currency that’s not controlled by any of the world’s 150+ central banks. Gold served this role for thousands of years, and now Bitcoin serves it as well. The trouble is that it’s quite difficult to quantify exactly what this is worth, so the price tends to be very volatile. Bitcoin’s current volatility is around 67% annualized, which is less than it used to be in the Wild West days but still over 4x the average historical volatility of the S&P 500. Additionally, there are a lot of people speculating on crypto for the wrong reasons, and the altcoin and stablecoin world, in particular, has been a hotbed for scams and fraud. Many of these concerns aren’t wholly unique to Bitcoin but apply to new technology in general.
The consensus explanation for Bitcoin going down seems to be due to the fact that it was a beneficiary of a lot of hot money from the stimulus in 2021 and from people who were trading meme stocks and altcoins. Now, with stimulus gone and speculative profits turning to losses, people are tapping anything reasonably liquid to raise cash, which could very well continue for the foreseeable future. But to be clear, Bitcoin is not GameStop (GME) or AMC Entertainment (AMC), which are money-losing companies with large debt loads. Bitcoin’s value is uncertain, while many of the meme names have negligible value as money-losing businesses.
Some savvy readers called me out for an apparent contradiction – how could I be moderately bullish on crypto while expecting the NASDAQ to drop this year? I didn’t explain it very well but the answer is that I firmly believe the fundamental value of BTC is likely to rise this year as adoption continues to increase. As for the market price, it’s more of a crapshoot – so far they were right and I was wrong, although later in this article I’ll show some ways that products tied with crypto markets are inefficient that can help you make money.
Is Bitcoin Currently A Good Investment?
To those new to crypto, old-timers may seem a bit blasé about volatility. It’s because while Bitcoin has been nearly cut in half, it’s still up ~100x from where it was 5-6 years ago. I think it’s safe to say that most old-time investors in BTC at least have their original investment off the table, with many buying cars, houses, and loads of index funds with their profits as well. Is BTC likely to do this well going forward? No, it’s not likely to return 100x from here. But Bitcoin is a legitimate asset class, and I’ve covered some of the nice technological improvements in BTC over the last year. I previously called for BTC to top its all-time high and top $100,000 per coin, but with the easy money conditions fading from the market, this may happen in 5 years instead of 5 months.
With BTC down into the $30,000s, at least a good chunk of the speculative froth has been erased, although more risk-averse investors may want to apply strategies such as dollar-cost averaging on buys and sells. In the long run, BTC is almost certainly a relatively better investment at $35,000 than it is at $65,000. In the short run, however, momentum is against crypto, which means that it may get cheaper still.
What’s interesting to many people (including me) about crypto is the fact that crypto markets are fairly inefficient compared with traditional financial markets. For example, there has been a notable cash and carry arbitrage between the futures markets in BTC and the spot price that has been traded by firms that set up specific desks to trade it like Goldman Sachs, RenTech, and Pimco. Investors gave away huge amounts of money to the prop desks with this by not understanding how futures markets and ETFs that track them work. One reason this happened is that investors expect markets to be efficient when they’re simply not for products like stock options and Bitcoin futures.
Another weird discount is the Grayscale Bitcoin Trust (OTC:GBTC), which now trades at an astounding 25% discount to its net asset value (it previously traded at premiums exceeding 100%). This YCharts data appears slightly inaccurate based on the more recent GAAP NAV data I have from Grayscale’s website, but you get the idea. Simply buy if it’s below NAV and sell if it’s above NAV/when the ETF conversion is approved. There are other possible angles here – one nice trade I saw done (if you can manage the risk well) was to go long GBTC and short MicroStrategy (MSTR), which both are tied to Bitcoin. If you want to buy BTC, I’d buy this, as Grayscale has a pending application to convert this to a spot ETF, which would immediately equalize the price to NAV by brute force, making Grayscale and its shareholders a ton of money in the process. You can read my full coverage of the mechanics behind this trade here.
Will the SEC approve the spot ETF? It’s not certain, but with Grayscale’s fee at 2% annually vs. a 25% discount to NAV, it seems like the price of GBTC is being driven by current liquidity conditions and not the odds of the SEC approving the spot Bitcoin ETF after already having approved a futures ETF. My personal opinion from reading is to expect the SEC to crack down on the rampant fraud occurring in the stablecoin and altcoin world while providing a framework for Bitcoin investors to have expanded ETF access, but there are plausible arguments for both sides.
Bitcoin Catalyst: Third World Adoption
Revolt against monetary policy confiscating the savings of the public is not new. In 1796, French revolutionaries smashed the money printing presses in a great celebration after widespread shortages and inflation. More recently, several Latin American nations have adopted the US dollar when public trust in their currency was sufficiently eroded that it no longer made sense to have them. Dollarizing your country’s economy is a good thing because it brings stability, cuts FX fees on remittances, and can help economic growth, but it’s sometimes a bad thing because governments lose the ability to raise revenue by printing money. Bitcoin could do this even more and lead to a more peaceful and prosperous world.
One of the poorest countries in the Western Hemisphere and led by a charismatic president with an authoritarian streak, El Salvador may seem like an unlikely place to be at the forefront of the crypto world, but when you dig deeper it makes sense. El Salvador adopted the US dollar in 2001 and now has adopted Bitcoin as a legal currency as well. One reason for this is that…