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Bitcoin prices in US$ are up a staggering 265% over the last year, outperforming every other FIAT (government issued) and crypto-currency for 4 years in the last 5. As at 10H00 Tue 9th May, Bitcoin touched $1,680 or R24,900 per Bitcoin on the local Bitcoin exchange. In the six years since May 2011 when it was a mere $4.10, Bitcoin has grown a compounded annual rate of 175%.
I have decided to focus on Bitcoin a bit. Many of my clients have consistently asked me about it during the course of the year, and at two recent lectures at university investment clubs, I was astounded just how many students hold, trade, mine and invest in Bitcoin. It’s truly a currency well adopted by the younger generation.
In the last 3 years interest in Bitcoin has been steadily rising according to search trends on Google. Interestingly enough, South Africa ranks quite high up on the interest rankings.
My reason for wanting to cover Bitcoin is that (1) the cryptocurrency industry is fraught with scams (money exchangers, cloud miners, pyramid schemes & peer-to-peer lending like MMM, etc.) and (2) just about all commentary I have seen from a South African perspective is ill-informed at best. In contrast, I like to think I am qualified to talk about Bitcoin when it comes to what works the best and what to avoid. Unlike most local commentators, I have been trading/investing/importing gear and mining actively with it for 18 months now. I have substantial positions as a percentage of my overall investment portfolio (5%) and I analyse and research this fast-paced market extensively. And yes, I have fallen prey to various scams and downright stupid mistakes in my endeavours to dabble and understand this space.
My articles are not here to teach you what Bitcoin or alt-currencies are. You must at least have a basic understanding of this which you can get from here and here. Instead I will focus on techniques of trading and investing, and how to avoid the mistakes I made. Bitcoin must not get confused with the Blockchain revolution (also see our article on the difference between them). Bitcoin runs on Blockchain technology and is but one use-case for Blockchain.
It is important to understand my position on Bitcoin before we continue. My belief is that Bitcoin will fundamentally transform the global digital payment and remittance space, as well as become a store of value as powerful as gold. As such, I view it both as a currency and a commodity and share views that it could potentially reach $10,000 by 2021. Despite Bitcoins’ recent meteoric rise, my thesis is that we are at the cusp of widespread adoption, and in fact it is this adoption that is driving the prices now. These are just my views however, and it is important to adopt your own view through your research.
Bitcoin is the Big Daddy in the cryptocurrency market, accounting for over 52% of all market capitalisation, next to Ethereum (15%) and Ripple (15%) and 760 other crypto-currencies. The user base and market cap of bitcoin are larger than most fiat currencies of small countries in Central America, Africa and Europe. The next step for bitcoin is to surpass the market cap of reserve currencies, to establish itself as the global currency used by mainstream users and general consumers.
Japan, the 3rd largest economy in the world, has just legalised Bitcoin as a form of payment. The Japanese government’s legalization of Bitcoin and the elimination of taxes for Bitcoin trading have hugely impacted the Bitcoin trading ecosystem and the demand for the digital currency in Japan and they account for over 34% of all bitcoin transactions today. Russia is following suit to legalise Bitcoin, as is India and Mexico. In countries like Venezuela, Bitcoin is the only means people can pay for goods and services as the government currency has all but collapsed under inflation. The only way they have to protect their wealth is through Bitcoin. (Ironically, Bitcoin is illegal in this country.) Nigeria’s inflation problems, whilst not as serious as Venezuela has led to a surge of use in Bitcoin in that country. In India, which is undergoing strict currency curbs (cash being removed from circulation), people are turning to Bitcoin. Bitcoin is altering the remittance game in emerging markets. Immigrants can send money to their families back home for up to one 50th of the price banks will charge, and in a tenth of the time frame.
My view is that Bitcoin is at the point where it can be considered another asset class for inclusion in your portfolio of shares, currencies, bonds, property, gold and commodities. The consensus among some wealthy billionaires investing in Bitcoin is that 1% of your portfolio is conservative enough. I like to think a little higher than that but this is very subjective.
As with other currency markets and commodities, the risk profile of Bitcoin is much higher than equities. Since Bitcoin is a nascent technology there are of course all kinds of technological, legal & political risks associated with it. It is very important to understand this when deciding what percentage of your assets to deploy in this space. But what currencies are not volatile? The Rand is quite happy to move 20-25% this way or that over any six-month period. In fact, Bitcoin is less volatile than the Rand and most emerging market currencies if you ask me. So, I think this kind of fear-inducing guidance is misplaced.
The rise of Bitcoin has resulted in institutional interest turning from a sideways glance to an intense stare. CNBC Analyst Brian Kelly attributed the recent surge of Bitcoin price to the rising demand of institution investors. An increasing number of investors and traders have begun to recognize Bitcoin as a long-term investment, store of value and settlement network, rather than as a short-term investment. It is this institutional interest coupled with widespread adoption in emerging markets that forms my belief that Bitcoin still has huge upside potential.
The nice thing with Bitcoin for South Africans, is that since its reference price is in US$, it is a useful hedge against Rand weakness. And given that 6% per annum depreciation in the Rand is "baked in" due to our inflation differentials with the US, this is especially pertinent.
The market capitalisation of Bitcoin is over US$ 28.0 billion. Many currency analysts say that Bitcoin needs to reach around $50 billion in market capitalisation to start spurring mass adoption, which at a rough guess will require a price of around $2,300-$2,600, which I believe will be reached by end 2017.
The Bitcoin price in US$ is shown below:
What we have done below is show the deviation of the Bitcoin price to its non-linear (mean) regression. It is showing that we are three standard deviations above the mean. You can see the last three "structural price changes" occurred against the backdrop of +3 standard deviations. This means the probability of a short-term pullback is very high.
It is thus fair to say at this time that the risk of a substantial short-term correction in Bitcoin at prices above $1,600 is rather high. Bitcoin sell-offs can be rather dramatic, as the 3-month rolling drawdown chart below shows. A correction of 25% to 30% is statistically feasible from this point.
It is possibly too risky to be getting into Bitcoin now. But if a 20-25% correction does present itself, then this may be an opportune time to get in for the long haul. The $1,300 level is actually quite an important support level as this level used to be the old resistance level we broke through. A break below this will lead to further declines but if $1,300 holds you have a long-term floor that will form the basis for entry.
Where will Bitcoin finish up in 2017? This is a real crystal ball type question but if we were to assume we are at the cusp of widespread adoption and thus adoption rates remain somewhat exponential and no major technological, legal or polital risk besets the ecosystem (big IF’s) then some high and low forecasts appear below depending on how aggressive we want to assume the non-linear adoption rate to be. An implied range of $2,500 to $3,800 is shown below, but be warned, the paths to these destinations will be far more violent than those implied by the smooth regression projections!
Users of Sharenet’s Advanced Charts (including PowerStocks Research and Premium subscribers) will see we now have live intraday Bitcoin price-streaming charts in both US$ and ZAR available in the FOREX tab:
We are also putting together a Bitcoin-101 Bootcamp training seminar where we cover all aspects of Bitcoin participation, namely trading the coin, holding the coin, security & tax considerations, mining the coin, etc. based on our own experimentation and experiences of the last 18 months. If you are interested in reserving a seat, please email firstname.lastname@example.org with your email, address and phone contact details or phone us on 021-700-4828. Note this will not be a free event, it will be on a Saturday and will likely cost R1200 to cover venue costs, speakers, snacks, our flights & accomodation etc.
Dwaine van Vuuren
RecessionAlert, PowerStocks Research
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.