The correction in Bitcoin (CCC:BTC-USD) earlier this month may have caught you off guard. But, it’s too early to say “party’s over” for the leading cryptocurrency, which has surged around four-fold over the past six months.
Why? Not just because BTC, which fell from around $63,000, to briefly below $50,000, has started to recover in recent days.
Some may see this is a “dead cat bounce” ahead of another decline, but it’s too early to speculate whether that will be the case.
Sure, retail investors may already be heavily into Bitcoin, Ethereum (CCC:ETH-USD), and other major coins. This could mean there’s little new retail money to bid up this asset class. And, yes, net inflows into crypto by institutional investors has also cooled off.
Yet, that alone isn’t a sign a crash is just around the corner. There are some possible regulatory developments (more below) that could cause one, but until we see actual policy changes these developments are little more than speculative chatter.
So, as clouds of uncertainty loom over the crypto space, what’s the best move? If you don’t own it yet, cautiously take advantage of the dip.
A small position will let you breathe a little easier. If cryptos live up to the hype, and this one goes to six-figure prices, buying now will save you from some future regret but if the bears are proven right and cryptos tank, the losses will not be a major setback for your portfolio.
Bitcoin Is the Best Way to Dabble in Crypto
With so many “altcoins” (non-BTC cryptos) making headlines, many are tempted to roll the dice on them. After all, early movers into Ethereum have seen tremendous gains. And, those who bought Dogecoin (CCC:DOGE-USD) for a penny are laughing all the way to the bank right now.
Crypto speculators with high-risk appetites can possibly mint small fortunes getting into the “next big thing” in crypto. Yet, for those most interested in dabbling in this space, your best move is to stick to buying Bitcoin.
Granted, as seen from its recent correction, its over $1 trillion market capitalization compared to the rest doesn’t make it immune from volatility. Even for an established crypto like this one, the days of it having the stability of a traditional fiat currency remain far down the road.
Volatility notwithstanding in the event of a crash, BTC would not likely see as dramatic of a drawdown compared to the smaller names in this space because of a higher level of ownership among institutional investors and greater liquidity.
Crypto in Regulatory Crosshairs Could Mean Trouble
The rise of Bitcoin, and cryptocurrencies in general, has convinced many that we are on the verge of a new paradigm. A world where decentralized finance (DeFi) disrupts the “old school” centralized financial system.
Parabolic price moves may have given this thesis substantial social proof. Fear of missing out on this megatrend has compelled many to dive into this asset class. On the other hand, there’s still a real chance this “brave new world” of blockchain-based finance will never come to fruition.
Crypto may have been a way to “hack” the system, and create an asset class with little oversight/regulation. But, it’s foolish to assume the U.S. and other major economies will allow this to carry on unabated. In short, it’s the specter of increased U.S. regulation, in all its forms, that could be what causes a crypto collapse.
Talk of Biden’s capital gains tax hike for the wealthy served as an accelerant for the crypto “flash crash” in mid-April. Some “HODLers,” who parlayed a small investment in Bitcoin in its early stages still have millions in unrealized gains on the table.
In addition, talk of U.S. Treasury Janet Yellen being on the warpath against crypto has intensified as well. Putting it simply, recent fears are not completely irrational.
Bottom Line: BTC Is a Cautious Buy on the Dip
For now, this may be mostly talk, but if the rumors turn into actual policy changes we could be in for some interesting times for the crypto space, and not in a good way. So, with the looming threat of regulation stopping the music for Bitcoin, Ethereum, and the rest, why would one want to dabble in crypto today?
Again, the forecast for this speculative asset class remains unclear. It’s hard to tell whether blockchain finance will continue to give the old system a run for its money, or whether the old guard will flex its power and stop it in its tracks.
In short, Bitcoin remains a gamble but is still worth the risk. Even with the talk of regulation sparking a crash, a cautious position in this high-quality crypto, following its recent pullback.
On the date of publication, Thomas Niel held long positions in Bitcoin and Ethereum. He did not hold (either directly or indirectly) any other positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.