Bitcoin’s Been Breaking Rules

Bitcoin’s market cycle has involved rallying to a new all-time high every four years and then entering a bear market. As bad as prices get in the bear market, bitcoin has not gone below the all-time high set in the previous cycle.

Until now.

In June, fears about the insolvency of several major lenders in the crypto space prompted a selloff that brought bitcoin’s price down to roughly $17,500 — over $2,000 less than the previous all-time high set in December 2017.

Bitcoin has been misbehaving in other ways. The top crypto asset by market cap has not had a weekly close below its 200-week simple moving average since 2015 (when it dipped slightly below) apart from the last two weeks.

Bucking the trend in this way has been a major headache for crypto lenders, especially the hedge fund Three Arrows Capital. It has defaulted on several loans because it, like many others, leveraged their holdings based on the assumption that this bear market would resemble previous examples.

Given that bitcoin accounts for over 40% of the total market cap of crypto assets, the question vexing crypto investors is “where is the bottom for bitcoin?” The historical data isn’t much help because we are in uncharted macroeconomic territory.

Bitcoin may have been born from the 2008 financial crisis, but it hasn’t lived through a recession. Indeed, the first bitcoin block was mined in January 2009 and contained a coded message: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The message referred to governments bailing out banks during the financial crisis and set the tone for bitcoin’s mission to be a decentralized form of money, which is independent of any one locus of control.

Bitcoin didn’t start formal trading until some years later, which means it has always existed in a period of generally excess liquidity and economic growth. With a recession on the horizon, and stagflation an additional threat, there is uncertainty about how bitcoin will stand up during this storm.

The investing world is full of clever people with impressive charts coming to contradictory conclusions, and there’s no way to predict future price action, especially with something as relatively new as bitcoin.

But I’m sure of one thing: Bitcoin will survive.

Securities and Exchange Commission Chair Gary Gensler recently said that U.S. regulators would likely classify bitcoin as a commodity. This makes perfect sense as bitcoin, unlike a security, has no issuer or management team, and the “mining” rewards are scheduled and set until 2140.

For years, the biggest threat to bitcoin was that the U.S. government and others would see it as a competitor to their currencies and ban it. Instead, they are classifying it as digital gold. And when the world’s premier economy regulates and makes a new asset legitimate, that asset is not going away, even if there is a big recession and oil hits $200 per barrel.

If bitcoin is here to stay and you care to own it, the only question is how to define your strategy. Unfortunately, the historical data is less than ideal at predicting bitcoin’s price action given the unique set of macro headwinds in play.

There are two ways of approaching this. The first is good ol’ dollar-cost averaging, and now might not be a bad time to start, given that many junk projects and unregulated cowboys have already been washed out of the crypto space. Or you could save your cash and see how bitcoin reacts to the macroeconomic situation.

Bitcoin is in uncharted territory, and even though most analysts pooh-pooh the idea of the price falling much lower, it could happen. By the same token, if the Federal Reserve stops raising interest rates, or the war in Europe ends, we could see bitcoin’s price double at breathtaking speed.

If you have a long enough time horizon, bitcoin is looking like it’s now getting into good risk/reward territory. Given the positive attitude towards bitcoin from the SEC and institutional investors, the potential drawdown from here should be limited.

And what’s the potential upside? So far, we have seen bitcoin deliver an annualized return of 143%, and that’s in a largely retail-driven market.

Ask yourself: Is the world becoming more or less digital? Will there be demand for a digital-native commodity that acts like gold, has a hard-capped supply, and can be transferred anywhere in the world at near-instant speeds?

Ultimately, bitcoin doesn’t need to fix the world’s problems, it just needs to survive. I for one am betting it does and becomes even more useful.