With gold and silver needing a breather, metal bulls would be wise to view bitcoin (BTC-USD) with some of their profits. While I have my doubts that bitcoin will eventually replace traditional inflation hedges like gold, it is one of the most interesting trades you can make at the moment. Although I believe it is a highly speculative asset, completely ignoring it as an investment will prove short-sighted in my estimation.
Overall, my investment thesis on bitcoin is pretty simple. In a world where real returns on treasuries are negative, investors need other monetary instruments to find a return. While I believe precious metals like gold and silver are as close to a sludge dune as you can get to hedge against inflation, cryptocurrencies like bitcoin offer the potential for similar wealth protection with possibly even more explosives on top than metal. Although my portfolio weight is very heavy for tickers and miners of precious metals, I think bitcoin is the better buy at the moment, considering the recent overbought conditions after making fresh highs in the metal space. Besides that, there are some recent catalysts that I see as very bullish for bitcoin going forward.
Big money buys
It is well documented that legendary trader Paul Tudor Jones is now a bitcoin bull. Grayscale Investments continues to aggressively add under management.
Source: Cointelegraph
Although I gave neutral coverage to the Grayscale Bitcoin Investment Trust (GBTC) back in December of last year, I still see Grayscale as a major gauge of sentiment from investors of higher net worth. Judging by the $ 217 million inflow into Grayscale following the launch of a new nationwide advertising campaign, it is safe to say that Grayscale’s slow pace of currency earnings is likely to continue. By token:
From 125,000 BTC at the beginning of the year, Bitcoin Trust increased its portfolio to 387,000 BTC by June 30, 2020. In terms of value, the trust went from $ 1.87 billion to $ 3.5 billion at the end of the second quarter, a increase of 90 percent as $ 1.63 billion.
And it’s not just Grayscale that is putting bitcoin on the balance sheet. I think the news about MicroStrategy (MSTR) is a big deal. In my opinion, a publicly traded company that moves all cash into cryptocurrency is a significant development because it shows acceptance of keeping unconventional monetary assets in reserve. That MicroStrategy put a quarter of a billion dollars into bitcoin is more than just a major development, it is a wonderful rejection of the reserve currency. Said company CEO Michael Saylor:
“This investment reflects our belief that Bitcoin, as the most widely accepted cryptocurrency in the world, is a reliable store of value and an attractive investment feature with more long-term valuation potential than cash holding.”
When you consider how large a percentage of MicroStrategy’s cash and investment is this investment, you begin to see how much conviction the company’s leadership has in this decision. This is not a small bet.
| Sept 2019 | Dec 2019 | Mar 2020 | June 2020 | |
| Cash and equivalents | 375.1 | 456.7 | 429.3 | 420.9 |
| Short-term investments | 203.2 | 108.9 | 109.9 | 110.0 |
| Total | 578.3 | 565.6 | 539.2 | 530.9 |
Source: Seeking Alpha, millions of USD
Technical outbreak
Although traders who move in and out of positions more often than I normally do will see things like daily and 4-hour charts, I like to see the monthly chart on bitcoin. Crypto-day trading is probably fun and very lucrative for talented traders. The problem is that most of us are not day traders and even those who are can easily find themselves on the losing end of a transaction. That’s why I love the monthly chart for bitcoin. It allows me to take the position and not worry too much about the daily or hourly movement. Although I never claimed to be an above average technical analyst, it’s hard not to see that bitcoin has produced some major prints in the last few weeks.
I see three important things that tell me that bitcoin is ready to start in the long run. First, the red arrow and red line show that bitcoin has convincingly erupted from the multi-year downtrend in which it has been since the 2017 half. The black arrow and line shows July as the highest monthly closing price since the 2017 high – perhaps surprisingly, this also makes July the one to highest month close in bitcoin ever. Finally, the purple arrow shows an RSI with plenty of room to run. As a long term swing trader and investor, Bitcoin here seems fantastic to me. Gold, on the other hand, sees the position for a pullback.
If we look at the same monthly time frame, we can see in July that the famous yellow metal was sitting at the most excessive level since early 2008. What came after that run of 2008 was a return of 33% in the following months. We know the rest. After the withdrawal, gold shot up more than $ 1,900 / oz in 2011. While I strongly doubt returning gold will be so difficult this time around, never say. However, the technical setup today looks set to favor bitcoin for influencer seekers.
Buy interest and adoption
One of the things that made the 2017 bitcoin such an aggressive bubble was the amount of dumb money that went into trading. Bitcoin went really viral, as it does in the mainstream news outlets and prime-time television series. By Thanksgiving, almost everyone had heard of it, even if they did not understand it. Data from Google Trends shows just how intense the search interest was in bitcoin at that time. It also shows how short the time of bitcoin was in the spotlight in the grand scheme of things.
Source: Google Analytics “Buy Bitcoin” Search Index, Yahoo Finance for Weekly High Price of Bitcoin – Author-Generated Visual
If we look at a simple Google search query like “buy bitcoin” with price, we can see a correlation for spikes in prices with spikes in search interest. Despite those spikes in interest, they are nowhere near the spikes we saw during the 2017 run. There is something to consider for full context when you look at this data. Many more entities now offer exposure to bitcoin than in 2017. It is much easier to get it. Therefore, “buy bitcoin” as a search now may not be as necessary as it was 3 years ago.
With that said, I think we can still find some interesting information from the search data. If we shorten our time horizon in the search data from 5 years to just 12 months, we can get an idea of how strong the interest in Bitcoin is at the moment. That data seems to suggest that interest in buying Bitcoin has been strong over the last five months compared to the second half of 2019.
Blockchain.com wallet creation information seems to support this interest. As of article entry, Blockchain.com shows 52.6 million blockchain wallets. This is greater than 13% of 46.5 million in mid-March during the 52-week lows.
When I look at these charts and I try to tie it all together, I see greater acceptance of bitcoin as an asset. I see a more sustained rise in consumer interest over these last few months. Compared to what happened in late 2017, this recent increase in interest rates this time feels much less like a FOMO trade. This concept applies in my personal experience, because the dumb money people I saw and heard about bitcoin in November and December of 2017 do not talk about it. The point is, I believe the current rise will be driven by smarter investors by 2020. I think this bodes well for the sustainability of a rise to new heights.
Risk
Although I am now Bullis and now in the longer term, there is a chance that bitcoin may backtest some support levels before going up in a significant way. Due to the extreme nature of bitcoin, it is not an asset that I would recommend buying if daily price action is a concern or if risk tolerance is low. My thesis that bitcoin can act as an inflation hedge could also just prove wrong.
Conclusion
I see a very specific tuning of important events happening at the same time; which all seem to be in favor of bitcoin. The Fed is “committed” to raising inflation and Jerome Powell does not even think about raising rates. Bitcoin’s biggest competitor for inflation hedge has just printed a new nominal all-time high and is very grateful for a pullback. Meanwhile, bitcoin has reached a technical breakout of a multi-year downtrend. Business interest in cryptocurrency is clearly steaming up. Finally, the recent breakout did not have the hallmark of a FOMO trade, in my opinion. I think there is significant room for bitcoin to run and I would not be surprised if the cryptocurrency takes its full height in the next 6-12 months.
Announcement: I am / we are long BTC-USD. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose supply is mentioned in this article.
Additional disclosure: I’m not a professional. Do your own research.
