Right now, the choice to buy (or not to buy) bitcoin (CCC:BTC) is a matter of choosing between fear of missing out (FOMO), or fear of holding the bag. Unfortunately, all bets are off which case (bull or bear) is going to play out in the coming months.
What do I mean? On one hand, the growing interest by institutional investors in cryptocurrencies indicates there’s further runway ahead in 2021. On the other hand, retail investor speculation could mean its a bubble just waiting to pop.
It’s like what’s going on with “hot” stocks like Tesla (NASDAQ:TSLA) right now. Those buying now aren’t buying on its fundamentals. Instead, they are trying to ride the wave, and make some easy money. But, this strategy is more like flipping a coin than making a well-thought out investment.
Admitedly, gambling in lieu of investing could continue to pay off. Just like how Tesla could soar above $1,000 per share on hype alone, this speculative asset could continue to rise as well. Not just back to its high water mark. But, to even greater price levels ($50,000+ per BTC).
However, with bubbles, it’s a matter of when, not if, it pops. Those buying today could see big losses, if the recent dip is only the start of a massive move lower.
So, with this high uncertainty in mind, what’s the best way to play bitcoin? For those (such as myself), who bought in at lower prices, there’s no reason to cash out now. There’s still a long-term case to be made for BTC.
But, those looking to buy now, as it trades near all-time highs? It may be best to sit tight. Wait for prices to head lower before entering a position.
Bitcoin: Bull Case vs. Bear Case
It’s easy to make the bull case for bitcoin. Why? It all comes down to two factors.
Firstly, the “smart money” is moving into it in a way that wasn’t seen during its last epic run in 2017. As InvestorPlace’s Ian Cooper discussed Jan. 19, this is largely what’s behind the ambitious price targets set by Citibank and Guggenheim. Their sell-side analysts teams project the popular cryptocurrency could head to $318,000 and $400,000, respectively.
Secondly, the specter of high inflation. Yes, gold, and even stocks, are a great hedge against the diminishing value of the U.S. dollar. But, offering returns uncorrelated with the price of gold (or even the stock market), bitcoin may be an asset to keep in mind as fears of inflation increase.
Yet, these factors alone don’t guarantee BTC is heading to six figure prices in the near term. Why? JP Morgan recently laid out the case why bitcoin could crash in the near term. Namely, if it fails to climb back to its high water mark, those who bought on momentum could start to bail out.
In short, while there’s still merit to the long-term bull case, this very volatile asset may see big swings lower in the short term. Expect that to be the case with other major cryptos as well.
Don’t Expect Other Cryptos to Perform Differently
With the concern bitcoin’s topping out, those looking for exposure may be taking a closer look at the other widely-traded cryptos out there. But, my on-the-fence view of this cryptocurrency also extends to its main rivals.
I’m talking about major names like Ethereum (CCC:ETH) and Litecoin (CCC:LTC). Why? Yes, as InvestorPlace markets analyst Thomas Yeung wrote Jan. 18, Ethereum stands to be one of the crypto “winners” in the long-term. That is to say, it’ll continue to be regarded as a store of value. This could be the case with Litecoin as well.
But, given their prices have risen in tandem with bitcoin, it’s hard to expect a scenario where either one makes a big surge higher, while BTC continues to tread water. There’s no issue with building a diversified crypto portfolio, but don’t expect returns to be that uncorrelated.
However, while it’s wise to stay on the sidelines with all three major cryptos, there’s one you should clearly avoid: Ripple (CCC:XRP). With little shot of recovery from its recent scandals, and its Jan. 19 removal from Coinbase, there’s absolutely no reason to buy it.
Bottom Line: Wait for the Pullback
Despite the high hype around it, there’s a reasonable case to be made that bitcoin will continue to rise over the long run. Namely, with the “smart money” now taking it seriously, it could continue to rise as an asset class popular with institutional investors.
But, while it could continue to appreciate in value long term, don’t take to mean now’s the time to dive in with full force. Bitcoin prices could head back to $30,000 – or lower – in the coming months. Wait for this to happen before buying.
On the date of publication, Thomas Niel held a long position in bitcoin.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.