Is Bitcoin’s Price Rise Sustainable?

No, we’re not suddenly in uncharted territory. We’ve always been there.

It’s quite stressful having skin in the game in a bear market.

You watch your net worth drop — sometimes dramatically and sometimes by the minute like some sort of slow-motion financial car crash — and wonder what the right call is.

Do you realize that paper loss and walk away, poorer in money terms, but (perhaps) richer in experience? Or hold on and keep your faith in whatever asset or product it is that you believe in?

The answer is an almost impossible calculation of variables, probabilities, emotions, and personal circumstances unique to each individual playing the game.

But what no-one tells you is that the stress levels are just as real when you’re experiencing a bull market, especially if it’s your first time witnessing it.

This time the stakes are higher because, in a bear situation, your losses are limited to what you first invested, but in the reverse situation, your gains are effectively unlimited.

So, as you watch your net worth head ever upwards, at what point do you lock in your profits and make it real, knowing that the act of doing so takes you permanently out of the running for any further gains?

Once again, that is your call, but as someone who has made every trading mistake imaginable, I can reassure you that you’ll never get it exactly right. No trader ever does.

But are we seeing something truly unique and record-setting with Bitcoin that dispenses with traditional rules? Are those four most dangerous words in the world of investing (“this time it’s different”) actually true for once?

Or are we closer to trading normality than we think?

Bitcoin really IS different?

At the time of writing this article, Bitcoin is experiencing an incredible bull run. Anyone who ever bought this asset will now be in profit and some considerably so when measured, as we do based on tradition, in fiat currency terms. For that measurement, we usually go by the dollar, which is, in itself, a variable indicator.

Bitcoin has already been the best performing asset of the last 11 years based on simple return calculations, but over just the last 90 days, it has increased its dollar value by 270%. Surely — surely — this is unsustainable?

Logic would dictate that this is the case, but maybe it isn’t. Maybe we see something unprecedented. And not all for reasons we’d like.

First, there is the “asset” itself. I use the term in a very general sense because Bitcoin sits outside our traditional definitions of assets, securities, commodities, and pretty much everything else. However, it also fits some of these categories when you consider certain attributes of the cryptocurrency on their own.

So, what IS it? Bitcoin is a currency with its own payment delivery mechanism built-in and has now become the digital age’s perfect definition of a store of value, literally Gold 2.0. Except it is far more secure, portable, divisible, and it’s available to all.

Since this has never existed in human history, it’s hard to work out where we go from here. There really isn’t comparable historical data, so the suggestion box is very much open.

The idealists lead us down the path of Utopian glory, the pessimists to disaster and ruin of millions of people. The reality is likely to be neither of those and probably more like a gradual transition of our global financial system using tools built on the settlement layer of Bitcoin.

It may take years, decades even, but it just makes sense.

After all, from now on, we’re always going to be transferring value digitally, not physically handing lumps of yellow metal to each other as we bounce around with our Elon Musk designed jet packs. We’ve moved on, and money is always the product of our latest technology.

And, of course, there’s Bitcoin’s other “Killer app” (as we used to say in the nineties); that of truly limited supply.

Sure, gold is scarce, but more gold is discovered all the time, and technology to bring it to the surface is constantly improving. This increases the rate of production over time and, as price increases, that process is accelerated.

Bitcoin’s supply is known, fixed at 21,000,000 coins and entirely controlled by the asset itself. It can't be changed by anyone, no matter who you are, and certainly can’t be affected by price. That means if you want to own some, you have to find someone to sell it to you.

And in a market of ever-growing demand, that’s a problem if you’re a buyer.

Bitcoin’s place in the world

Even Bitcoin’s biggest detractors would probably agree that the idea of Bitcoin — that we could have a truly limited, desirable, durable, divisible, secure asset of some sort that everyone has a fair chance of earning, buying or holding and storing value — is a good one, even if they really don’t like Bitcoin itself.

Something like that would certainly help right now because the macro environment we all now find ourselves living in is, frankly, terrifying.

There are hundreds of eye-popping quotes, soundbites, and charts I could show you that neatly demonstrate the size of the precipice we are peering over right now in terms of our financial system. Still, these are all a distraction from the main point: the people with money have categorically started moving out of fiat cash and into Bitcoin, sometimes even from other hard assets such as gold.

Already, the list of publicly listed companies and very high net worth individuals is far too long to list in one little article like this and, like Mike Novogratz, CEO of Galaxy Investment Partners, stated on CNBC yesterday:

It’s shocking to me how many institutions are now lining up to try and get Bitcoin into their portfolios

The keyword in that list was “shocking.” Why? Because Novogratz is a long term Bitcoin bull, who has always been clear, as I have, that institutional money will eventually flow to it.

If he is “shocked” at the number of people looking to invest, what sort of numbers are we talking about?

It’s important because, as I have already calculated in this article, there’s very little supply out there in their real terms and only an extremely limited number of opportunities — even globally — for companies to convert some of their cash to Bitcoin on any significant scale. If more than this number try and do it, then that demand dynamic is simply never going to reduce.

Which means we’re back where we started. That is, the only way you can acquire some is if someone sells it to you.

The trouble is, Bitcoin is different and creates a strange paradox. As it becomes more valuable, people are actually less likely to sell, especially if they truly understand the asset they are holding. In turn, this creates a higher price, which leads to the same problem over again.

It’s a classic deflationary spiral and while this is not all a good thing economically speaking, nowhere is this more obvious than with Bitcoin.

The short version of all of this is that Bitcoin is perfectly placed in terms of development, adoption, and stage of the lifecycle to be a close-to-perfect solution to a problem that has always been present in the background but has only now started to become openly visible.

With credit to Victor Hugo, we can put it even more simply:

Nothing is more powerful than an idea whose time has come

What do the charts say?

I’ll openly admit I’m not the best at Technical Analysis (TA). Still, I’ll even more openly admit that I believe TA is entirely irrelevant when it comes to Bitcoin, at least for the foreseeable future.

When people have asked me about it, my response has always been the same:

Bitcoin is one announcement away from a major move, whatever the charts say

It’s important to understand that I don’t mean to belittle any process or individuals who use these techniques — they absolutely have their place and tis is, after all, only my opinion— but my point was always that Bitcoin’s market and supply were too small for Technical Analysis to be truly effective. As a mature asset, years from now, when we’re dealing with Satoshis, that may well be different.

The point is that no chartists correctly predicted the movements we’ve seen over the last few weeks. Not only that, but everyone using TA has since consistently (and quite rightly) pointed out that Bitcoin is overbought due to various indicators and is due a correction, possibly even a really big one.

The trouble is, we’re using the same tools on what we know is a new and very different asset in a very new and very different set of macro circumstances with (for the first time in history) a truly limited supply. How much actually applies here?

The honest answer is that we don’t know.

So, for me, this all comes down to the balance between two forces:

The nature of Bitcoin itself, its demand level and the speed of decay of the current financial system,

versus

The market rules and dynamics combined with the collective psyche of people.

Market rules still apply. That is, people can set stop losses, leverages, take profit levels, etc., like any other asset, which can sometimes move the markets quickly. And people will react in the moment, despite the underlying fundamentals of an asset.

Recently, for example, Bitcoin dropped thousands of dollars in minutes, most likely caused by a few traders (or perhaps one large one) unloading some Bitcoin for fiat profit and possibly dropping the price enough force liquidation of some over-leveraged longs, dropping the price again and creating a new cycle.

In other markets, this might cause a panic, and those who are not experienced as traders or simply have a different objective might offload more, causing a further price drop. In this case, because the underlying demand is simply insatiable at the moment, the lower-priced Bitcoin was immediately snapped up, and the price went on its merry way upwards without being overly bothered by it.

In different times that outcome would be different, but the question is, will we see those “different times” at any point in the near future? With so many institutions, companies, funds, and high net worth individuals vying for a spot at the Bitcoin table, it’s pretty clear that any lower-priced Bitcoin won’t stay on the market for long.

This means usual rules don’t apply, at least for now.

The bottom line

So, does that mean Bitcoin is set for unlimited growth?

It’s possible, but the grim reality is that if that’s the case, then the situation around us will be dire — a true disaster scenario. That is, the dollar being debased, people’s wealth being wiped out, and never-ending government stimulus, all of which creates an enormous set of problems for pretty much everyone on the planet.

The theoretical numbers for global demand are astronomical against a minuscule fixed supply, and, as some of my colleagues often point out:

Bitcoin has no top because fiat has no bottom

On paper, at least, the trend is undeniable and the fundamentals just keep getting better, but perhaps the more pertinent question is this:

Would our human minds accept the reality of an asset that just keeps rising in price?

It seems too much to ask. We simply have no experience of anything like this that hasn’t ended in the collapse of the asset itself. So, as usual, the weakness in the formula is not in Bitcoin itself, but in the humans who use it.

And we are damned unpredictable.

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If you hold Bitcoin, should you sell? If you don’t hold Bitcoin, should you buy it? How do you make the right call?

Bitcoin’s supply is extremely scarce, and each day that goes by, it gets harder to obtain. But does that means we’ll ever run out? Not exactly.

If you still don’t own any Bitcoin, you may want to consider this article. A tiny investment could make all the difference — but time is of the essence:

Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency.

Disclaimer: This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose.