It takes a certain type of outside-the-box mind-set to invest in Bitcoin. Often considered the “mother ship” of cryptocurrencies, Bitcoin lies outside of the mainstream banking system. However, that could change in the future.
Still, for the time being, Bitcoin is considered an off-the-grid type of investment. As an asset, it’s not like a stock or a traditional currency. It’s more like a “currency of the people” as the government can’t just print Bitcoin units at will.
Be aware, though, that as an investor you’ll need to monitor two assets at once: Bitcoin and the U.S. dollar.
Like a seesaw, if one goes up a lot then the other will likely go down in comparison. And given the dollar’s unsettling future, investing in Bitcoin may be a relatively sure bet.
A Closer Look at the Bitcoin Price
One thing’s for sure: you don’t want to put a large portion of your capital into cryptocurrencies. They’re speculative and volatile, and there’s absolutely no guarantee that they’ll go up in value.
That being said, Bitcoin’s recent price action is highly encouraging. Bitcoin was stuck at around $9,000 from May through mid-July, but then a breakout of epic proportions took place.
With hardly any warning, Bitcoin shot up like a rocket in July’s back half. By early August, it was trading at the $11,500 level. Thus, the bulls have re-asserted themselves after hiding in the shadows for a while.
Interestingly, the onset of the novel coronavirus put negative price pressure on Bitcoin. Therefore, if there is another huge wave of Covid-19 infections, that could induce another correction in the Bitcoin price.
Yet, just as Bitcoin rebounded this summer, it should be capable of recovering from future crashes. Bitcoin nearly reached $20,000 in late 2017, and the bulls are determined to get it back to that level someday.
A Commitment to Inflation
There’s little doubt that the U.S. Federal Reserve is committed to keeping government-bond yields low. For example, the annual yield on the 10-year Treasury is less than 1%. The “dot plot” recently issued by the Federal Open Market Committee made it crystal clear that bond yields will likely stay low for a while.
That’s probably bullish for other asset classes, including stocks and Bitcoin, since ultra-low yields make bond investing unattractive. However, there’s another proclivity of the Federal Reserve that’s even more Bitcoin-bullish than bond-yield suppression.
I’m referring to the Fed’s likelihood to raise the dollar-inflation rate in the coming months and years. A cheap dollar makes it easier for America to pay off its dollar-denominated debt, which runs into the trillions.
Dollar Pressure, Bitcoin Treasure
The U.S. annual inflation rate is very low at 0.6%. That’s not what the Fed wants, and for years its target inflation rate was 2%. Going forward, it’s easy to envision the Fed striving for a higher number than that.
Ed Yardeni, the head of Yardeni Research, evidently models a major inflation ramp-up:
“We believe that the Fed publicly would welcome inflation in a range of 2% up to 4% as a long overdue offset to inflation running below 2% for so long in the past.”
Whether this is actually “long overdue” is debatable as a diminished dollar isn’t necessarily beneficial for the struggling American consumer. But what about Bitcoin investors?
If you’re measuring Bitcoin against the dollar, then the Fed will be the Bitcoin investor’s ally. It’s certainly no coincidence that the dollar’s recent drawdown happened at the same time as the aforementioned Bitcoin rally.
Is It Time to Invest in Bitcoin?
There is a speculative aspect to cryptocurrency, and no one can categorically tell you whether you should invest in Bitcoin or not. But if you do decide to buy and hold Bitcoin, at least you’ll have America’s central bank working in your favor. And that, indeed, is a powerful ally to have.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.