With the Bitcoin price down 8% from February’s highs is it time to buy the dip? We look at the risks and opportunities of timing the market.
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The Bitcoin (CRYPTO: BTC) price is down 2.3% over the past 24 hours. One Bitcoin is currently worth US$56,612 (AU$74,489).
Bitcoin is still up 95% so far in 2021 but has now retraced 8% from the US$61,556 it reached on 14 February, according to data from CoinDesk.
Which has crypto enthusiasts and newbies alike wondering, is it time to buy the dip?
Timing your entry
For an answer to that question, we turn to Simon Peters who is a market analyst at eToro. The online trading and brokerage company bought Bitcoin for its own balance sheet. This happened more than 10 years ago when it was worth $5.
Now only the most bearish crypto analysts forecast the Bitcoin price will return to those bargain-basement levels. But the notoriously volatile digital token could certainly go lower from here.
Asked whether ASX investors should wait for a potentially bigger price fall before buying Bitcoin, Peters told the Motley Fool:
Timing the dip of any asset is both risky and difficult, as the price could fall further than the point where you think the bottom is. Ideally, the investor would need to have some knowledge of reading charts and using technical indicators to identify the bottom, or very close to the bottom of a dip or retracement.
Long-term investors, those planning to buy and hold, may find it easier to dollar cost average. Buying with a fixed amount each week or month, for example, regardless of what the price is. This strategy may not yield the highest returns versus buying at the bottom of a dip, it removes the complication of trying to time the market.
Can Bitcoin shine amid renewed inflation concerns?
Crack open the financial news and you’ll almost certainly run across several articles highlighting the potential risks of resurgent inflation to share markets.
You’ll likely also find at least 1 article from a prominent central banker attempting to allay those fears.
We don’t have a crystal ball. But the broad consensus is that whether inflation begins to impact interest rates and share markets this year or next, we can expect the erosion in the value of our fiat currencies to return.
But how about cryptocurrencies like Bitcoin? Can Bitcoin serve as an effective inflation hedge?
Here’s what eToro’s Peters told us:
Bitcoin has fulfilled the criteria of an inflation hedge, which is an asset that protects against the decreasing purchasing power of a domestic currency. More people are viewing it as such. This first happened with individual investors. Now we are starting to see corporations hold Bitcoin in their treasuries as an inflation hedge instead of cash.
Peters said he expects more investors will turn to Bitcoin as an inflation hedge. Especially if global governments and central banks continue their easy monetary and fiscal policy measures. That in turn, he said, should see the Bitcoin price keep rising.
What could send the price lower?
With the Bitcoin price up 670% in the past 12 months, and more institutions lending their support for the crypto asset, what tailwinds could drag Bitcoin lower?
According to Peters, there are a number of risk factors Bitcoin investors or speculators should be aware of:
Firstly, we could see government or regulatory intervention, making it harder or illegal to transact, hold, or mine Bitcoin.
Secondly, a flaw or vulnerability in the underlying blockchain could get exploited. For example, a 51% attack where miners collude to control the majority of hash rate on the network. Whilst this is very difficult to execute, it is not theoretically impossible.
Lastly, we could see price manipulation. Bitcoin is arguably not as liquid as other assets like stocks, meaning significant orders (sometimes referred to as whales) can severely affect its price.
He noted that any of these issues could see investors lose confidence in the world’s biggest crypto and send the price lower.
The case for holding Bitcoin
Peters reminded us that it’s been just over a year, 11 March 2020, since Black Thursday. That was the day a technical failure on the Bitcoin Mercantile Exchange (Bitmex) saw futures crash more than 50%. And the Bitcoin price crashed below US$4,000.
Since then, he told the Motley Fool, Bitcoin has gone “from strength to strength”.
The case for holding bitcoin has increased over the period, with institutional investors now holding the crypto asset, as they look to alternatives to fiat currencies. With big corporations also lending their support, the future has never looked brighter for crypto assets.
Tesla’s decision to both accept payment for its cars in bitcoin and hold that bitcoin on its balance sheet rather than convert it to dollars will likely build more momentum for the crypto asset.
Tesla and other companies are showing that crypto is here to stay, and its mainstream adoption is only going to increase.
With a finite supply of Bitcoin, Peters said increased institutional interest in the digital token could cause a supply-side squeeze and see prices continue to rise longer-term.
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Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Bitcoin. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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