How to play the next move in Bitcoin

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Getty Images

Getty Images

Almost a year ago, I had the most bitcoin optimism I have ever been. Fears around a winter wave of Covid were growing and investors debated how much stimulus the next president should inject into the economy. The Nasdaq was in the midst of a correction as bond yields surged higher. Bitcoin, however, was heating up.

My take on bitcoin has always been remarkably straightforward: It is a high risk buy option in case our financial system gets so wacky that people are looking for this internet token for security reasons. The odds of this probability are usually very low, but change depending on how strange things are. For context, we recently debated the definition of transient and thought about minting a trillion dollar platinum coin. So yes, bitcoins in place.

Things were even stranger last October. Vaccines were not yet a certainty and Covid was picking up again, but home tech stocks were dragging on the Nasdaq anyway after a random but explosive high in September. The future was extremely uncertain, with the exception of one thing: It didn’t matter who won the election, more money was on the way. One trade has started to gain momentum: bitcoin.

There are some big similarities today. Tech stocks are struggling, yields are climbing again, and the perpetual waiting game for Even More Stimulus is more alive than ever. And once again, bitcoin finds its place as everything else seems fragile: it’s up 14% since the market peak on September 2, a rare degree of inverse correlation reminiscent of last year’s epic burst. .

My take in October of last year was that it was better to wait for bitcoin to completely pass its previous high rather than position itself ahead of it. Rallies after bitcoin breakouts are huge and obvious when they happen, so there’s not a ton to be gained by trying to lead it.

I think this approach is even more justified this time around, because there is one key difference between now and then: the dollar is rising pending tighter monetary policy from the Federal Reserve. This could well be the Achilles heel of bitcoin: cash is coming out instead of going in. The question at this point is whether the next round of fiscal stimulus will add enough speculative power to propel bitcoin past its previous high.

Regulatory surprises or the approval of a bitcoin ETF are also wild cards at this point, but don’t change much in the math: the coin looks set to rally, but after taking such a lead over other assets at risk, the possibility of a severe rejection is too high to risk a breakout at the head.

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