Bitcoin May Look Hot, but the Bear Move Might Not Be Over

Not long ago, it seemed that bitcoin could only go up. But some gravity is starting to take hold. Since reaching an all-time high of over $42,000 on Jan. 8, there has been a spike in selling. Consider that the price is now around $31,000.

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Of course, BTC is still well above its low set in March, when the pandemic hit. At the time, the price was lower than $4,000.

In other words, after any big surge, there is inevitably a correction or even a bear phrase. But how long might this last? Should investors remain cautious on the prospects for bitcoin?

Well, let’s take a look:

The Pros of Bitcoin

There are myriad of positives for the bull case, at least for the long haul. Perhaps the most important one is the growing interest from institutions and billionaire investors.

For example, BlackRock (NYSE:BLK) recently amended the charter on two funds to invest in bitcoin futures. There have also been investments from financial services firms like Massachusetts Mutual Life Insurance.

Why the interest? For the most part, bitcoin is considered a hedge against the value of the dollar. With the spikes in the money supply from the Federal Reserve and the federal stimulus to combat the pandemic, there are growing fears of inflation.

Keep in mind that bitcoin has a relatively fixed supply. In fact, top investors like Paul Tudor Jones, Bill Miller and Stanley Druckenmiller believe that this digital asset is equivalent to a modern-day version of gold.

Here’s what Druckenmiller said about this on CNBC: “Frankly, if the gold bet works the bitcoin bet will probably work better because it’s thinner, more illiquid and has a lot more beta to it.”

But there is another big driver for demand: fintech companies like PayPal (NASDAQ:PYPL), Square (NYSE:SQ) and Robinhood. They have made it easy for anyone to buy bitcoin with their mobile apps.

The Cons of BTC

Even though BTC is a digital currency, it still represents a small portion of merchant transactions. Instead, it is mostly a vehicle for speculation among investors!

The reality is that it will likely take a considerable time for bitcoin to become a trusted medium of exchange. The reason is that many people simply do not understand it or realize the benefits of switching.

Next, there is the nagging concern about politics. The new Treasury Secretary, Janel Yellen, is not a fan of cryptocurrencies. In her Senate confirmation hearing last week, she noted: “Cryptocurrencies are a particular concern. I think many are used—at least in a transactions sense—mainly for illicit financing.”

She then went on to say that cryptocurrencies should be “curtailed,” at least in terms of dealing with money laundering.

Given the priorities with the Covid-19 pandemic and the need to revive the U.S. economy, Yellen probably does not consider regulation of these digital assets as a priority. But this could change in the next couple of years, and any political risk could be a big problem for bitcoin.

Bottom Line on BTC

It’s important to note that bitcoin is relatively new, having been launched in early 2009. As a result, it has not been tested in inflationary environments. Besides, it is far from clear if inflation will run rampant either. The last time this happened in the U.S. was back in the 1970s. In fact, if inflation does become a problem, it seems likely that the Federal Reserve will take action.

Moreover, whenever there is a parabolic move in a financial asset, there is always a pull back. And this can be severe. We have actually seen this several times with bitcoin during the past few years. Thus, it might be worth it to take a wait-and-see approach.

On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-Profit IPO Strategies and All About Short Selling.  He is also the author of courses on topics like the Python language and COBOL.

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