We are talking bitcoin today. Is it finally ready for its next run? It’s looking good.
Before we get started, in case you missed them, here’s a quick best of from the last week:
Check out this interview with Alex Langer of Sierra Madre. There could be a real opportunity setting up there.
Monday’s piece on the yen - nobody’s talking about it. (The yen, that is. Everybody’s talking about my piece. Obvs).
And the story of my pilgrimage got a big and positive response. Take a look.
As regular readers will know, I argue that bitcoin should make up a core part of your portfolio. Its potential is so enormous, the risk, in my view, is not having some exposure. We have a sizeable allocation the Dolce Far’ Niente portfolio.
But I’m also realistic enough not to think that bitcoin only goes up. There is a repeating bitcoin cycle of four phases (outlined in full them here). Briefly, they are:
1. Quiet Accumulation.
2. Frenzy and Blow-Off Top.
3. Monster Correction.
4. Frustrating Consolidation.
For some time we have been meandering between 4 and 1. The nature of 4 is that it can go on for at longer than you want or hope. Hence “frustrating”.
My solution is to keep a core position, don’t trade in or out and wait. HODL, as they say. The risk is that you either lose your position or don’t have a position and then 2 comes along.
There are signs that we may be moving from phase 1 to phase 2. Bitcoin has been on a nice run. It has more than doubled this year - but quietly. Few are talking about it. Now it looks like this bitcoin ETF is going to be green lit. Suddenly, the bitcoin price shoots up, we are at $35,000 and bitcoin’s getting a lot of publicity again.
Bitcoin ETF - good or bad?
(See footnote1 for an explainer on what an ETF is)
A bitcoin ETF will be good for the bitcoin price, even if, as a bitcoin purist, you might not like the idea. (What happens if/when one of those things get hacked?; I thought bitcoin was supposed to be a new financial system anyway etc).
A bitcoin ETF will open up entirely new markets at both retail and institutional levels, and a lot of new capital can come in. All those who did not buy either for regulatory reasons or because they never got round to familiarising themselves with the tech, will suddenly be able to buy, and easily. “I don’t understand it” will no longer be an excuse.
Lord knows how they arrive at this figure, but Blackrock’s estimate is that $200 billion will flow into bitcoin as a result of it and others’ ETF.
On Monday the bitcoin price shot up 10%, some $3,000, a $63 billion increase in market cap. But that increase in market cap came on just some $325 million of buying. What’s $200 billion of capital inflow going to do to the bitcoin price? One calculation says it gives us $2 million bitcoin in three years. I’ll take that!
One reason that relatively small amounts of capital inflow can move the price so much is because there are so many HODLers, so many people who don’t sell. Obviously higher prices will tempt them, but even so the multiples are quite something.
A word of warning about this bitcoin ETF, however, and one I have mentioned before. We saw it with the gold and silver ETFs when they were launched in 2004 and 2006. There was a lot of hype going into the launch of each and the price of the underlying commodity rose sharply, in part because of the hype and in part because of ETF accumulation of the commodity in advance of the launch. On both occasions a sell-off followed. They were classics of the “buy the rumour, sell the news” genre.
Longer term, however, the price is much higher. Gold was around $440 when GLD, the world’s largest gold ETF, launched in November 2004. It rose to $460 and then came down to $415. In the broader picture those numbers are meaningless. Today we are close to $2,000. But at the time they felt significant. To anyone using leverage those swings will have been violent.
Nevertheless this ETF, post launch pull back or not, could easily be the trigger for the next “frenzy and blow off top” phase. We also have the halvening (who invented that word?) to look forward to in spring next year (when the amount of coins produced in mining gets reduced). Bull markets tend to come around these halvening events.
Here’s why I am excited about bitcoin at the moment, in a way that I haven’t been for some time.
The Golden Alignment of Moving Averages
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