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Should I sell my Bitcoin?
Over the weekend, someone asked me if they should sell their Bitcoin holdings after the recent collapse. Firstly, this is in no way meant to be financial advice.
But it’s an interesting question. These last few months have been painful to watch, especially for those holding cryptocurrencies.
Following the crypto crash of Luna-Terra and then the liquidity troubles with US crypto-lending platform Celsius, Bitcoin looks to be next. It’s down nearly 74% from its November all-time high of $69,000. The world’s largest cryptocurrency was last trading at US$18,103, having broken its main support level at US$20,000 and is looking like it might go a lot lower.
The truth is, Bitcoin can go to zero.
We already know that it’s not a currency, asset, or commodity; it has no underlying cash flows, it has no intrinsic value and is not pegged to anything of value. So, what moves the Bitcoin price? You’d say supply and demand and that there is only a finite amount of Bitcoins in circulation. Or Bitcoin mining, together with computing power and regulations moves prices. All of the above is true, but none of these factors is what truly drives the Bitcoin price.
While bitcoin’s volatile price movements might seem random, they are often driven by the same fundamental catalysts that drive share markets… investor sentiment. The fear of missing out is what drove Bitcoin’s price from zero to hero. Its price climbed from essentially zero to as high as $60,000 in under a decade. The sole reason anyone ever bought Bitcoin, was to speculate on an appreciating asset irrespective of its intrinsic value – or lack thereof.
If you think back to the early days, Bitcoin’s rapid price appreciation saw tiny Bitcoin investors become overnight millionaires. And so, Bitcoin was the ultimate get-rich-quick scheme. People bought in anticipation of another increase and then sold once it occurred. Others bought Bitcoin intending to hold onto it for much longer, despite the dips, in the hope of replicating the same success. Some Bitcoin traders are so convinced, they’re holding on for Bitcoin to hit the $100,000 mark. One day.
And prior to its recent collapse, Bitcoin advocates were spruiking the advantages and benefits of holding Bitcoin to boost the currency’s allure. Unfortunately, many of these claims have since come undone. The most popular was that Bitcoin was a hedge against inflation, and should be considered a safe-haven asset that could replace gold. Unfortunately, the main driver of Bitcoin’s price is investor sentiment, which means it should crash in tandem with global markets.
And it did.
When the coronavirus first hit global markets in March 2020, Bitcoin lost 57 percent in two days at the same time the Dow Jones Industrial Index fell 26 percent. Then, when confidence returned, the stock market rebounded, and so did cryptocurrencies. Prices hit all-time highs the following year, partly due to massive stimulus pumped into the system by central banks and for the simple fact, it was an opportunity to make extraordinary gains.
And then, inflation hit.
While Bitcoiners were spruiking crypto as an anti-inflationary hedge, it ended up being nothing of the sort. Crypto assets were instead moving in-line with risk assets such as sexy tech stocks, which are characterised by their high volatility. During a market collapse, investors will capitulate and will offload the riskiest of assets, which in this case, hands down, was Bitcoin.
The price can continue to spiral downwards to pre-pandemic levels i.e. below US$10,000 and lower. But this isn’t the end of Bitcoin, especially because of the recent flood of institutional money and the listing of a few cryptocurrency exchange-traded funds (ETFs) in the US and in Australia.
Bitcoin may not have any intrinsic value, it may not be a currency or an inflation hedge, but one thing it can do is generate exponential returns. If history repeats and demand returns back into Bitcoin, there is a very big chance the cryptocurrency will recover almost instantly. The trick is to treat Bitcoin in the same way you would treat a sexy tech stock: after a downturn, buy-back on the rebound, when confidence begins to return and markets start to rally.
Hold on, and get ready for a hell of a ride back up, because it will likely happen in the blink of an eye.
