Crypto is all over the news. And bitcoin is front and center.
Today I’m laying out a bitcoin primer outlining the pros and cons. So, if you’ve ever wondered, Bitcoin boom or bust – I’ll show how to make a clear-eyed call.
And as a tease, at the end of this article I’ll show you a Big Money chart of bitcoin, using the MAPsignals process. Let me know if you’re interested in mapping crypto!
Alright, let’s talk bitcoin.
Bitcoin Boom or Bust
What is bitcoin? Answering this question can get complex. But here’s the gist.
Bitcoin is a digital currency. It’s unique compared to fiat currency like the dollar in that it’s based on a decentralized system that records transactions in a distributed ledger called a blockchain.
Decentralized in this case means that the network is shared amongst each member rather than a single entity. And the blockchain keeps record of transactions via a digital ledger.
This is important because this ledger can’t be changed. Think of this like a bank statement that records your account activity, but on a much larger scale. These are 2 fundamental tenants of the blockchain.
Let’s take it one step further and discuss mining. Bitcoin miners run super-computers to solve complex puzzles to confirm groups of bitcoin transactions called blocks. Once confirmed, these blocks are added to the blockchain record, and the miners are rewarded with a small amount of bitcoin.
Okay, that’s a very basic outline. Now, let’s discuss the bull and bear case for the asset.
The Bull Case for Bitcoin
Show me the money!
Bitcoin has outperformed everything over the past decade. It’s generated annualized returns of 153% vs. only 17% for blue chip stocks, 13% for small caps, 1.6% for gold and 2.8% for bonds (see chart).
And Bitcoin has scarcity value because only 21 million coins can ever be mined. About 19 million bitcoins have been mined to date, meaning only 2 million in new supply will ever hit the market.
Add to that, experts estimate roughly 3 million coins have been lost through compromised passwords, further shrinking the available supply. So, if you’re worried about inflation of your fiat, bitcoin could be an alternative.
Let’s keep going. Bitcoin is increasingly seen as a store of value. Its limited supply makes it very different from dollars, euros, or yen. A decade of endless central bank money-printing has many investors nervous about major currencies.
Bitcoin’s ability to potentially hedge against currency weakness is a big reason it’s increasingly popular with big money managers. The recent spike in inflation only enhances its appeal as a hedge. Check out my thoughts on inflation here.
Finally, bitcoin fans view it as digital gold. Bitcoin seems to be stealing gold’s thunder. After all, gold was down in 2021 despite major inflation fears.
Gold’s market value is $10 trillion, and bitcoin is worth $800 billion. If bitcoin eventually pull’s even with gold with both markets’ worth about $5 trillion, bitcoin would fetch $256,000 per coin.
This is one side of the bitcoin boom or bust question. Now let’s check in on the bear case.
The Bear Case for Bitcoin
For every bull, there’s a skeptic.
Some see bitcoin as having zero intrinsic value because it doesn’t produce any income. It’s only worth what someone else will pay you for it. Owning it is like playing hot potato!
Additionally, the macro tide is turning against crypto and other speculative bets. Bitcoin has lost about 40% of its value since peaking at $68,780 last fall. That’s when the Fed confirmed rate hikes were coming.
Unprofitable growth stocks have also been crushed. Meanwhile, safer, dividend paying drug stocks, banks, oil companies, miners, industrials, and utilities are outperforming.
Why? Much of the cash central banks pumped into the world economy to save it from Covid wound up in crypto and racy stocks. With the Fed about to start raising interest rates to cool inflation, investors are favoring cheaper, steady-Eddy stocks.
Finally, to round out the bitcoin bear case, we need to acknowledge how volatile it is. 50% drawdowns happen every year. When you factor in the wild swings, stocks are a better choice to build wealth.
This is my simplified bear case for the bitcoin boom or bust question on investor’s minds.
Let’s bring it all together: Technology is disrupting day to day life at dizzying speeds. It’s exciting to want to own a piece of the digital future. Bitcoin checks that box for a lot of people. If you decide to take the plunge, here’s how to do it:
- Don’t invest more than 3% of your investment portfolio. If the bulls are right, the upside is big enough you won’t need much exposure to boost your overall returns. And if not, downside is small.
- Only buy bitcoin when it’s getting crushed! That’s when you pounce! MAPsignals’ contrarian signals are perfect for helping you pick your spots.
- Buy it directly from a major player like Coinbase – skip the ETFs – they don’t track bitcoin that well and their ongoing fees are far more expensive than paying for a one-time purchase.
- Once you’re long, leverage reliable sources to stay on top of things – MAPsignals will dip toes in the space soon to help with this!
Lastly, now that you’re up to speed on bitcoin, here’s a sneak peek at how BTC looks with our Big Money signals.
Just like we map the big money with stocks, what happens when we map them on bitcoin? Have a look for yourself!
What’s super cool is, like stocks, we can see constant big money pouring into BTC, driving it higher. Also, notice how the red signals usually trigger more red…that’s a trend we’re excited to get your feedback on.
Let us know in the comments if you’d be interested in the MAPsignals perspective on the crypto market.
And if you missed our latest video, check it out: Top Stocks to Invest in for 2022
Luke breaks down his Top Stocks to Invest in for 2022.
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Alec Young is an investment strategist, working on Wall Street since 2005. He currently serves as CIO at Tactical Alpha LLC.
Prior to TA, he served as FTSE Russell’s Managing Director of Global Markets Research and Global Equity Strategist at S&P Global.
See his full bio here.