Behavioral finance experts have confirmed, time and again, one phenomena that surely applies to bitcoin (CCC:BTC). That is: the fear of missing out.
That emotion is so prevalent when it comes to bitcoin that the currency deserves its own FOMO ticker on the New York Stock Exchange and NASDAQ. And importantly, investors who have FOMO will repeatedly pull an anti-Warren Buffet; they buy high like lemmings and sell low like frightened rabbits.
If that describes you, chances are bitcoin is not the right investment for you. Its price fluctuations are the stuff of runaway-rollercoaster legend. Anyone who looks at its price charts on even a monthly basis better have nerves of steel.
For while the sky’s the limit with its price, its floor is extremely low, and heaven help you if you lack a parachute when things go awry.
You see, no central government is backing the cryptocurrency. No gold or tangible asset guarantees its value. If bitcoin investors en masse rush for the exits, a free fall is not out of the question. Yet given that bitcoin is up 222% in the last 12 months, it deserves a closer look from yours truly. Here’s how I view its prospects with the first quarter of 2021 well under way.
Bitcoin and the Ivy Leagues
We can determine the viability of bitcoin, at least in part, by looking at who has an investment stake in it. That’s crucial because as bitcoin gains critical mass, it is also gaining acceptance at many levels of the financial food chain.
Especially in the cryptocurrency’s early years, that was a difficult feat for it. It had a reputation as the currency of choice for drug dealers and international criminals. (Then again, those groups like cash, too,)
By contrast, bitcoin today seems to have gained a following among Ivy League institutions. (No jokes about white collar criminals, please.) CoinDesk reported on Jan. 25 that the endowment funds at Harvard, Yale and Brown have apparently been buying the cryptocurrency for a year or so via Coinbase. So has the equally elite University of Michigan. If that’s true, then these institutions of higher learning have something to teach us.
Beyond this, bitcoin is being covered by Wall Street analysts. If Wall Street investment banks take this cryptocurrency seriously, that should tell you something. Now of course, bitcoin’s volatility has led to a wide spectrum of opinions. On the one hand, JPMorgan recently forecast that bitcoin’s price could rise above $146,000 in the long-term. And on the other, Guggenheim Partners Chief Investment Officer Scott Minerd told CNBC that the currency could retreat as low as $20,000.
So who’s right? Might as well flip a bitcoin. Or, hold on while I work this out.
A Crypto That’s Tricky to Track
If the variance of opinion isn’t enough to confuse you — and it sure confuses me — bitcoin’s movements can be spurred by extremely irrational catalysts. Let’s rewind to the bitcoin price spike of 2017. It’s been well documented that the cryptocurrency was a conversation starter at Thanksgiving meals that year, where loudmouth uncles who usually hold court about political conspiracy theories decided instead to brag about the huge profits they had made with bitcoin.
And so, bitcoin jumped $10,850 in two weeks to a peak of $19,650 on Dec. 15, 2017. And then, it tumbled $10,855 exactly three months later. And you thought hitting the craps table with a fistful of Benjamins was risky.
Bitcoin experienced one more ugly seesaw since. Then it began an uninterrupted climb on March 14, 2020. That makes sense, considering that Wall Street was deep in the funk of its so-called “Covid-19 Crash” at the time. Many ran to bitcoin for shelter from the crisis much the same way goldbugs do. Since March 14, bitcoin has shot up 531% through Jan. 26.
Dropping or Popping?
The questions I’m hearing a lot these days are: Is bitcoin coming down from a steroid shot of speculation? And did it peak way too high? Given the straight-up price hike and all that comes with it, including the desire to take some profits, I do see bitcoin dropping — maybe not to $20,000, but certainly well off its peak. Even since topping $40,000 on Jan. 8, it’s skidded by 25%.
Now watch me put on my behavioral-finance hat on again. Nice round numbers like “$40,000” tend to freak out a certain kind of investor the way “Y2K” convinced a lot of people that all the world’s computers would go into a tailspin. That tech nightmare, of course, never materialized. But is bitcoin beginning a tailspin of its own?
It’s too soon to say. But the 2017 skid happened when bitcoin flirted with $20,000. What’s more, a drop of 20% in less than three weeks would make investors in a conventional stock very nervous. And it makes me cautious. The cryptocurrency hit the magic 40K and now — and I’m convinced of this — a certain class of bitcoin bugs has become spooked. Now what?
An Analysis of Analysts
The future depends on whether the momentum created by bitcoin believers touting (and using) it as a legit currency can counter the bad mojo of speculators in a panic. Here’s the thing: Bitcoin is much more mature as a financial tool than it was just several years ago.
When I see payments’ giant PayPal (NASDAQ:PYPL) buy up the cryptocurrency as an apparent move to accommodate it on the company’s online payments system, that strikes me as proof of bitcoin’s present and future viability. The PayPal posse recognizes what not all investors may know: So many online merchants already take bitcoin that they can’t afford to ignore it.
Neither can we. So who’s right? JP Morgan? Or Guggenheim Global? I think they both are.
As we surface slowly from the pandemic, crippled sectors such as travel and entertainment will spring to life. Investment opportunities to buy stocks at the bottom will abound. Money planted in bitcoin could likely move to these areas as they rebound and thus depress the currency’s price.
Off Its Peak But on Its Way
But in the meantime — and this is what makes this investment unique — remember that bitcoin is a currency. And unlike any other currency I know of, more people are learning about and adopting it. Novelty is turning into ubiquity and, perhaps at some point, scarcity. There’s a finite supply of bitcoins out there: 21 million.
I see myself taking a stroll down Bitcoin Broadway at some point, just not now. Reading the crypto-tea leaves may be the best I can do, but this we know: That giddy $40,000 peak just wasn’t sustainable in the short-term. And it won’t be revisited in 2021.
After that, I believe $146,000 stands as a distinct possibility. Even falling a bit short of that would sure be nice. In fact, it would make bitcoin the very definition of a hit coin.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.
