In early January I wrote a note on this publication explaining why I changed my mind on Bitcoin. I explained that my mind had previously been closed and after careful research throughout December, I decided to take a position in Bitcoin and focus more on understanding the implications of digital assets in a post pandemic world.
The price since that note had doubled, but now, where back to the same starting point, somewhere in the order of US$30-40k. I feel a moral obligation to update my view and how I’m now thinking about Bitcoin five months later.
There’s nothing worse than reading an opinion and then seeing that person abandon or ignore that view when the market moves down or sideways. I generally like to hold my investments for as long as possible, opting never to sell unless there has been a fundamental change to my initial hypothesis or I no longer like the risk to reward ratio (When to take profit)
Two fundamental changes
Last week’s selloff has highlighted two significant changes in my fundamental view and rationale for owning Bitcoin. The first reason is Elon Musk’s ability to impact the price with each tweet. This brings into question the whole notion of decentralisation. One of the big reasons for Bitcoin adoption is the hypothesis that Bitcoin is a completely decentralised network.
While the technology is decentralised (no single entity can control the way the blockchain functions), Bitcoin as an investment and asset is not decentralised. In fact, it’s very centralised — both on the way up and down. There’s something that doesn’t feel right when a billionaire or government official can impact the price of an asset by 20-30% with a single tweet.
In my humble investment experience, I’ve never seen a single tweet impact the price of gold or US dollars by such a large factor. These are considered the world’s two largest reserve currencies and wealth storage mechanisms. It’s even odd for large stocks. Who can shift the price of Apple by 20-30% in a single day via Twitter?
Again, we need to distinguish between Bitcoin’s inherent technology (which is decentralised) and Bitcoin’s qualities as a financial asset (which isn’t decentralised).
The second fundamental shift for me is Bitcoin’s carbon footprint. Now again, one can argue that Bitcoin’s electricity consumption was well known before the Musk tweet. That’s true, but it doesn’t change the fact that Bitcoin’s proof-of-work mechanism — the single thing that makes it decentralised — also makes it extremely energy intensive.
I find it hard to see how many institutional investors will jump on the Bitcoin bandwagon in the context of more energy sensitive community and corporate governance measures to pivot away from fossil fuels. Perhaps Bitcoin mining will evolve quicker than expected and find cleaner forms of energy. The thing is, I’m not sure when that will happen. As much as Elon Musks’ tweets annoy me, I think he makes a very valid point.
Bitcoin has an energy problem that isn’t going away anytime soon.
It’s a speculative asset
I’m a big believer in digital assets and the future of cryptocurrency as a long term macro theme. I love what I’m seeing and very excited by it as an investor. However I’m now regarding Bitcoin as a very speculative bet. It can either go to $1m or $100. I think there’s a good chance it goes higher after falling and consolidating (more on that below), but I’m also prepared to see it go back all the way and become insignificant.
It’s a 50/50 punt and to hold it as an asset, you must be completely ok with losing 90% of your money. If you cannot afford to lose that much, you shouldn’t be hodling/trading it.
If you’re ok with the risk tolerance, then I think Bitcoin can still post some big gains in the next 3-5 years. Position management is very important, you should always consider using stop losses and pay close attention to technical levels which will dictate the market.
Fundamental vs. technical analysis
I’m 99% into fundamentals and 1% into technicals. Perhaps it has to do with my early career as a stock analyst at Morningstar, one of Wall Street’s best known fundamental analysis research firms.
However I don’t think fundamental analysis is appropriate if you’re holding Bitcoin in the next couple of years. The whole argument about inflation and storage of wealth would hold true if Bitcoin was a currency or storage of wealth. But it isn’t that yet, maybe in the future. But not today.
I’m not an expert on technical analysis but I have spent time understanding and using Fibonacci levels and I think for Bitcoin, it is probably your best bet. Learn about Fibonacci and it will open up your eyes to the beautiful world of mathematics and relationship between numbers and nature.
If you own Bitcoin, spend an hour online learning Fibonacci retracement and jump set up a free account on tradingview.com
I wouldn’t subscribe to any service, listen to any Youtube experts or pay attention to anybody on Twitter who offers a magic solution. If you want the potential upside that comes with crypto, you have to be prepared to do the work.
Have many things going on
Before I run you through some of my key levels, I want to stress the importance of being diversified across different assets. Having a crypto portfolio means nothing when most coins will track in the same direction as Bitcoin. It’s worthwhile getting some gold and silver if you believe inflation is set to become a big global problem. It’s also wise and prudent to have residential real estate in your portfolio if you can afford to do so.
The best inflation hedge is running a successful business. Your revenue and profit track inflation.
Delete your trading apps
Delete your crypto trading app (after you have set your stop loss levels) and dedicate the time into building multiple sources of income…or what some like to call, a side hustle. It doesn’t matter what you do for work, it’s always a good idea to up-skill and learn something new. It makes you less fragile.
Crypto trading apps are designed with social engineering and optimised to get you addicted. I’ve worked for some very large trading companies in the past, many of the executives came across from the gaming industry. Like slot machines, cyrpto trading apps are designed to lure you in and get you to trade as much as possible, so exchanges make fees.
It’s addictive, I know. But don’t fall for the trap. Focus your attention where it matters, watching Bitcoin or crypto prices all day has zero/negative correlation with your trading performance.
The charts have the answers
If you’re hanging for some price levels, take these with a grain of salt. If $36k doesn’t hold, you could see a test of last week’s lows at around US$29k, if that holds, a nice bounce is possible.
There’s a lot of resistance on the way up, if US$36k holds, watch the next test of US$42k and so on…if you’re trading, these might be good enough levels to base your short term stop losses or buy orders in.
If you’re going to listen to people on Youtube or Twitter (even though I think you should avoid them), make sure you’re listening to people who can teach you how to do fibonacci analysis, rather than tell or sell you magic numbers.
I’m hopeful that we continue to see innovation in the crypto space because I absolutely love it. Hopefully we find better decentralised and clean energy solutions that aren’t exposed to the rate of speculation we’ve seen in Bitcoin over recent weeks. It’s still very early days and these things are expected in emerging markets.
Just understand that you need to think 5, 10 and even 20 years ago. You need to survive to exploit the best opportunities which are ahead of us. To survive, you must ensure you don’t blow up. Stay focused and diversify.
Finally, make sure you subscribe to my weekly newsletter as I’ll be writing more on Bitcoin in the coming weeks, including updated levels. It’s a 100% free, no spam, no BS. I do this because I love sharing my thoughts and insights with my readers each week.