This post is the second in a trading tips series called ’The Writing On The Wall’, in which our game theory guide Eric Wall tries to anticipate market signals. This week’s focus is on timing your bitcoin investment and when it might be the best time to buy.
Is it a Good Time to Buy Bitcoin?
The price of bitcoin has risen +938% this year so far. What’s new for 2017 are the signs of institutional capital finally finding its way into the cryptocurrency market through various means (1,2), but we’re nevertheless also seeing an unprecedented influx of retail investors, with Coinbase adding roughly 50,000 users per day as of late. Many new speculators have been watching bitcoin from the sidelines for some time and are now warming up to the idea of finally taking the leap. But, given the tenfold increase bitcoin has already enjoyed this year, it is of no shock that the most echoed concern from these users is whether or not it really is a good time to buy right now.
In this article, I will do an analysis of the current market situation in bitcoin in order to try to answer that question.
First, we need to establish some time-frames on which the question is supposed to be evaluated. Essentially, what the question “Is it a good time to buy?” really is asking is whether or not there’s a good chance that there will be an even better buying opportunity presenting itself in the future. As such, I will analyze the prospect of that happening on three time-frames of different lengths.
1 month (December)
In December, the most crucial event taking place in terms of the bitcoin price is by all accounts the 18 Dec launch of cash-settled bitcoin futures on the Chicago Mercantile Exchange (CME). The CME is the world’s largest derivatives exchange, and is connected to hundreds of brokerage firms from all over the world. Its futures are traded by hedge funds, trading firms, portfolio managers, hedgers, individual traders and market makers, who collectively account for trading volumes of roughly 20 trillion USD on a daily basis. With the introduction of bitcoin futures on the CME, the global economy will gain access to exposure to bitcoin, and bitcoin will gain exposure to the global economy.
The introduction of bitcoin futures on the CME will doubtlessly impact the market in several ways. I contend that the largest impact that the futures will have on bitcoin is the impact on its legitimacy and its liquidity.
Legitimacy: One of the main reasons why the Winklevoss ETF was rejected was due to the fact that the majority of bitcoin trading volume occurred on unregulated exchanges which lacked surveillance and the controls necessary to prevent market manipulation in the eyes of the SEC. Moreover, Bitcoin still carries the taint from its Silk Road days, and is still seen by some as a tool for narcotics trafficking and money laundering. In fact, many large funds still consider bitcoin an un-investable asset solely based on these associations. The CME futures mark what I believe will turn out to be a historical turning point of colossal magnitude in terms of the acceptance for bitcoin and its legitimacy as an asset class.
Liquidity: Liquidity is one of the most important strengths of any currency as it is rudimentary both to its medium-of-exchange and its store-of-value properties. For the average investor this is not often a noticeable issue, but for an institutional investor the property of being able to enter and exit an asset without moving the market is one of the determining factors in whether or not the asset is investable at all. Even though the CME futures are cash-settled and act more as bets on the price of bitcoin than trading of the actual asset (as with spot markets), futures and spot market prices are tethered to each other through arbitrageurs and professional market makers, and thus benefit from each other.
Combined, these two factors of increased legitimacy and liquidity contribute to the fact that the introduction of CME futures is–broadly speaking–a very big positive for bitcoin in the long term. Based off of that alone, we should be able to expect a continuation of the current positive trend throughout December.
But, while the CME futures are a net-positive for bitcoin, one needs to look at the broader picture in order to fully understand the short-term impact of this event. As outlined in my introduction post on market memeology, the price is currently being aggressively driven by the “Get in before Wall Street!”-meme from retail investors. On December 18th, that meme comes to an abrupt end. Although the CME is not technically Wall Street, the idea of getting in before institutional capital does vanish on that date. And while I have some insight that the interest from institutional investors is real, my assessment is that most are still warming up to the idea rather than sitting with their fingers on the trigger waiting to buy as soon as the futures launch. As such, unless a new bullish meme preemptively picks up the baton before this one fades, a better buying opportunity than the current one may indeed present itself around this date.
Historically, bitcoin price rallies have been accompanied with large pullbacks. There has never been an extended period of time in which bitcoin was not subject to some scandal, controversy. Euphoria is well-known to oftentimes turn into desperation in this market. There is no way to be sure that this won’t happen again during the coming six months. At the same time, there is neither any guarantee that it will happen, nor any guarantees what the price may be when it does. Additionally, knowing when to enter during a falling market is equally difficult. When the price is falling tremendously, there is usually some horrifying news circulating which makes one hesitant of buying bitcoin at all. By the time those fears have dissipated and bitcoin looks like a good investment again, the buying opportunity may have vanished.
To be blunt, if you want to know whether bitcoin is a good short-term investment at $11,000 right now, the answer is no. Going in now and expecting the price to be $20,000 within six months following a YTD +938% price increase is nothing more than a gamble. Any investment into bitcoin needs to have a longer investment horizon than 6 months.
Simply put, bitcoin is on the path of becoming digital gold and the soundest form of money this world has ever seen. In an objective comparison between the properties that makes gold valuable and the properties of bitcoin, bitcoin is superior to gold in the same way that e-mail is superior to mail. The only thing that bitcoin needs to compete with gold is legitimacy, which it is gaining very rapidly. One year ago, the value of all the bitcoin in the world was 0.15% of the value of all the gold in the world. Today, that number is 2.3%. If you, like me, believe that that number will turn into 100% in 3-5 years, then bitcoin is a very good investment right now. What new investors need the most is not luck in timing the market, it is knowledge of bitcoin and how it is solving the problems it is solving.
Dollar-cost averaging is an investment strategy for entering the market by buying with smaller amounts over a period of time. Instead of investing a lump sum right way, you can divide the sum in to three or five smaller sums and invest it over the course of a few weeks or a few months. This strategy is recommended for new investors who struggle with the idea of buying at the top of a perceived bubble, since it will limit the probability that they’re buying at the absolute worst moment. However, empirical evidence show no superiority of dollar-cost averaging compared to a lump sum investment (in fact, the data suggests the opposite). Still, this can be a good investment strategy for traders who are nervous about their timing.
Buying bitcoin right now with a short-term investment horizon in mind is not a wise move, but as a long-term investment it can still be an extremely good bet if you turn out to be right. There may be some more advantageous buying opportunities in the short to mid-term than the current moment, but timing the market is difficult. Bitcoin is in a very bullish trend that comes accompanied with retail user growth and acceptance by the traditional world of finance. There are no particular signs of that stopping in the coming months, and no signs that bitcoin as an asset is currently overvalued.