Don’t Get Shaken Out by Bitcoin’s Wild Ride

As you might have noticed during the past decade, whenever bitcoin (CCC:BTC) makes a big move, other cryptocurrencies follow. And if the move is to the upside, suddenly a whole lot of folks want to own some bitcoin.

Smartphone with Bitcoin chart on-screen among piles of Bitcoins
Source: Shutterstock

That’s perfectly fine as long as the crypto traders know what they’re doing. I strongly suspect, however, that there are many people who are new to cryptocurrency investing — and they’re probably shocked by the recent price action of bitcoin.

Owing to the buzz surrounding bitcoin, it’s likely that some blue-chip stock investors migrated over to the crypto camp and made their first purchase.

Not long ago, there was a massive price shakeout that undoubtedly left some participants shell-shocked. It’s a real shame if they sold their bitcoin holdings, as the fundamental reasons to own it haven’t gone away.

Putting Bitcoin’s Ascent in Perspective

As of Jan. 14, bitcoin’s 52-week high and all-time high stood at an astonishing $41,946.74.

That’s amazing, because bitcoin’s 52-week low price was just $4,106.98. Moreover, one bitcoin cost less than $1,000 in early 2017.

But before you think about going all-in on bitcoin, hold your horses. Let’s do some math here. Sure, bitcoin went from $1,000 to $40,000+. But to make a 40x move starting from $40,000, BTC would have to get to $1.6 million.

I suppose that such a scenario is possible. After all, there will (supposedly) only be 21 million bitcoins ever made. A limited supply of bitcoins and a deteriorating U.S. dollar could certainly propel the BTC price much higher over time.

Still, we have to be realistic with our expectations. Bitcoin was $1,000 back when most people had never heard of it. Today, it’s in the mainstream media. It’s not a completely ground-floor opportunity anymore.

A Bumpy Ride

Besides, the journey to $40,000 was neither smooth or easy. There were horrendous price crashes.

It didn’t help when Warren Buffett said that bitcoin is “probably rat poison squared,” or when Chinese officials threatened to ban bitcoin mining.

What BTC investors need to understand, more than anything else, is that volatility is not abnormal in the world of cryptocurrency. Your bitcoin can gain or lose 30% or more in a matter of weeks or even days.

So don’t expect this cryptocurrency to behave like a blue-chip stock. There’s no dividend and no government-funded corporate bailout here. It’s more of a grassroots movement based on a tech-enhanced vision of a better, inflation-resistant form of money.

If you own bitcoin now, you might have recently gotten a taste of cryptocurrency’s propensity for volatility. Hopefully, you didn’t lose your cool as it tumbled from $42,000 to the short-term low of $32,300.

Picking Your Poison

Maintaining a long-term view can help to assuage your fear when the bitcoin price plummets. Even with the recent correction, BTC has still posted very strong gains over the past year.

It can also help to remember why you own bitcoin in the first place. For notable investor Bill Miller, a good reason is because the dollar is destined to decline over time.

There’s merit to that argument, as the Federal Reserve doesn’t seem to mind allowing annual U.S. dollar inflation to stay near 2%. As a result, Miller declares that cash will be a “guaranteed loser.”

With the dollar’s devaluation in mind, Miller’s conclusion is that, “It’s more a risk management strategy than anything else to have a little bit of money in bitcoin.”

So, what about Buffett’s comparison of bitcoin to rat poison? Miller’s retort is razor-sharp: “He may well be right. Bitcoin could be rat poison, and the rat could be cash.”

The Bottom Line

There’s no right or wrong answer to the question of whether you should own this cryptocurrency.

But if you’re considering a little bit of protection against dollar inflation — and if you can handle the outsized price moves — then a small investment in bitcoin could be right for you.

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

David Moadel has provided compelling content — and crossed the occasional line — on behalf of Crush the Street, Market Realist, TalkMarketsFinom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. 


Article printed from InvestorPlace Media, https://investorplace.com/2021/01/hold-on-and-dont-get-shaken-out-by-bitcoin-wild-ride/.

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