Bitcoin Correction Is Coming, But This Run Feels Different

Amid a breathtaking rally that’s drawing many comparisons to its 2017 run, bitcoin is garnering plenty of attention this year. From its March nadir around $4,900 to its peak just days ago, the leading digital currency more than tripled.

Source: Shutterstock

On Nov. 27, bitcoin was clinging to the $17,000 area. Shedding roughly $2,100 per coin in a matter days, the premier cryptocurrency has some investors feeling skittish and worried that a 2017 redux is imminent.

Another way of looking at bitcoin’s recent retrenchment is that it’s healthy and expected after the aforementioned more-than-tripling. After all, high-flying securities of all varieties don’t move up in straight lines and encounter pullbacks along the way.

Still, it may be hard for some market participants to shake those 2017 comparisons. One of the more prominent financial market lessons is that while “history doesn’t always repeat, it often rhymes.”

Conversely, the case for bitcoin adoption is growing stronger and declines can be viewed as buying opportunities. Rampant monetary easing by global central banks is debasing fiat currencies. Many investors seek seamless, less storage intensive alternatives to gold with some market observers saying bitcoin could be the gold of the 21st century. Those are just two of many tailwinds for the digital coin.

Bitcoin: This Time Could, Probably Should Be Different

Meanwhile, it’s worth acknowledging that the 2020 rally isn’t an identical twin to 2017. Put simply, the 2017 was largely fueled by the “fear of missing out” (FOMO) retail crowd, but this year’s pop has a more sophisticated feel to it.

“While the 2017 bitcoin rally was driven by higher volumes, likely due to retail demand, the 2020 price rally so far has been driven by lower volume,” according to VanEck research. “We believe the 2020 rally is driven more by institutional allocation and that investing in bitcoin has become less speculative in nature, which indicates bitcoin’s increasing status as a store of value and suggests further potential adoption.”

Back in 2017, several crypto brokers experienced outages just as bitcoin was making record highs, likely exacerbating the subsequent decline. Three years later, the bad actors in that bunch are gone and the industry is more mature.

Speaking to the maturation of bitcoin as an asset class and investors demand for it, fintech behemoths PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) allow users to purchase and hold the digital currency via Venmo and Cash App digital wallets in what’s an evolving, potentially lucrative source of top line growth for both companies.

“We note that the current rally is supported by PayPal’s launch of a new service enabling bitcoin and digital asset buying and selling to its network,” according to VanEck. “PayPal services 26 million merchants and 346 million clients globally. SoFi, Robinhood and other major financial companies offer similar solutions. Banks are also looking to offer bitcoin exposure to compete with fintech offerings in order to retain and grow client-base.”

Ebbing Volatility Helps

The crypto is shaking its reputation for turbulence. This adds to the case for bitcoin, particularly for smaller investors and those new to the asset class.

Bitcoin is just a couple of months shy of its 12th birthday – still a baby in financial market age. Nevertheless, it rapidly developed a reputation for volatility. This was reinforced by the 2017 rally and 2018 plunge. Fortunately, data suggest bitcoin’s volatility is waning. And there are other, perhaps surprising assets that expose investors to more stomach-churning moves.

A recent VanEck study found that over a 90-day period ending mid-November, 112 members of the S&P 500 were more volatile than bitcoin over that span and on a year-to-date basis, that number swells to 145. Think about that for a moment. To this point in 2020, more than a third of the S&P 500 is subjecting investors to wider swings than allegedly wild bitcoin.

On the date of publication, Todd Shriber owns shares of SQ.

Todd Shriber has been an InvestorPlace contributor since 2014.

Article printed from InvestorPlace Media,

©2021 InvestorPlace Media, LLC