Is Bitcoin A Buy, Sell, Or Hold On The Recent Dip? (BTC-USD)

Investment Thesis

The bears in Bitcoin (BTC-USD) are back! So, it’s a great time to pay attention to Bitcoin’s price action now as these bears start populating their bearish thesis on the world’s most widely-followed cryptocurrency.

We last covered Bitcoin in September, where we highlighted: “Is Bitcoin a Buy or Sell Now? Wait for the Double-Bottom.” We saw surging optimism again by bullish crypto traders/investors. But we cautioned that the upward momentum had already lifted off by then. Therefore, it pays to be patient and wait for the momentum to wane before adding exposure.

Alas, the opportunity has presented itself again, as Bitcoin’s momentum spike has been digested since it went on to establish an all-time high (ATH) of $69K in November.

As Bitcoin is testing critical support levels now, we think it’s an opportune time to update our readers whether Bitcoin is a Buy/Sell/Hold now.

Will Bitcoin Drop Again?

We can easily observe that BTC-USD was rejected at the critical resistance level of $65K for the second time in November. However, it’s currently being supported above the $40K bear-trap level, which could support further consolidation. Otherwise, we envisage potentially more robust support at the $30K level if the $40K level fails to hold. We can’t tell exactly whether near-term volatility will continue to impact Bitcoin’s price causing it to drop again. However, these are two critical levels of support to sustain the long-term uptrend of Bitcoin. Therefore, investors are encouraged to monitor these levels closely.

In addition, the crypto fear & greed index is now back reflecting “extreme fear.” It is a contrarian indicator, and thus it also offers additional confluence to our price action analysis. Previously in October/November, it was well into the “extreme greed” zone.

Is Bitcoin a Long-Term Buy?

Bitcoin bulls have often lauded that Bitcoin is a hedge against macro assets volatility due to its relatively low correlation. However, Coindesk highlighted that BTC-USD’s correlation to equity markets crept up towards the end of 2021. Moreover, it also coincided with a period of heightened volatility in the equity markets as growth stocks sold off. Hence, market observers noted that Bitcoin’s price movement is increasingly correlated with risk assets, particularly growth stocks.

The International Monetary Fund also warned that such increasing correlation could raise the “risk of contagion across financial markets.” In addition, Morningstar data also showed that Bitcoin’s average correlation with the S&P 500 increased to 0.36 in 2021, from 0.22 in 2020. Notably, it was negative in 2017 and 2019, while its correlation was just 0.04 in 2018. We believe that such a trend will likely continue in the future. However, it may affect investors who wanted to use Bitcoin to diversify their equity portfolios. Therefore, these investors may find Bitcoin less attractive now with its increasing correlation. Notwithstanding, we believe this is a positive development for long-term Bitcoin investors.

The S&P 500 index is undoubtedly in a long-term uptrend, through the peaks and troughs over the years. We are not expecting Bitcoin to exhibit such long-term stability yet, given that it’s still a nascent digital asset. However, we believe that the increasing participation by retail investors, corporations, and institutional investors will lend credence to its long-term legitimacy. Thus, Bitcoin’s traditional tenet as a store of value is extended further as a viable trading asset as more investors participate in its growth story.

Moreover, we have seen more companies investing in Bitcoin over the past year.

In 2021 alone, many institutions added bitcoins to their balance sheets. As of 31 December 2021:

• MicroStrategy (MSTR) holds 124.4K bitcoins
• Tesla holds 48K bitcoins worth $2.3B
• Galaxy Digital (OTCPK:BRPHF) holds 16.4K bitcoins
• Square holds 8K bitcoins

Notably, MicroStrategy continues to pile on to its Bitcoin holdings, as it added 1,914 bitcoins in late December. It now holds nearly 124.4K bitcoins, with an average price of about $30K. CEO Michael Saylor believes that there are multiple ways to monetize the growing horde accumulated by his company. He emphasized that MicroStrategy could monetize its holdings through special lending arrangements, as a partnership investment, or even as collateral for long-term debt funding. With the increasing participation by institutional investors, Saylor is looking well ahead to capitalize on hoarding BTC at “reasonable value” for future monetization purposes.

Moreover, the thesis behind Bitcoin’s finite supply of 21M has been thoroughly discussed even though it isn’t expected to peak until 2140. But, Bitcoin’s total supply has already crossed 18.93M (as of 16 Jan’22) from 18.16M a year ago. The demand/supply dynamics will likely continue to favor a long-term uptrend if institutions and corporations continue to increase their adoption of Bitcoin moving forward.

In addition, Bloomberg’s senior commodity strategist Mike McGlone, who was among the first to call out BTC-USD reaching $50K emphasized (edited):

Bitcoin comes with a “lack of supply elasticity.” Because the pace of new Bitcoin production is already set by the underlying blockchain’s programming, a higher price won’t automatically lead to more supply. Supply, demand, adoption, and advancing technology point to Bitcoin continuing to outperform fossil fuel in the next 10 years. (Coindesk)

What Risks That Investors Must Know

Readers must be prepared to ride out Bitcoin’s inherent volatility during times of momentum spikes (downward or upward spikes), exacerbated by greedy and fearful traders at the peak and troughs of Bitcoin’s price trend. Therefore, we encourage readers to adopt a long-term investing mindset and not one where you move in and out of the currency regularly. Moreover, if you use leverage/margin, you must ensure that you understand the risks of how such volatility can potentially decimate your positions if you do not adopt robust risk management frameworks. But, given Bitcoin’s high volatility, we strongly discourage using any leverage at all.

Moreover, regulators have also become more interested in Bitcoin’s developments. While they have not endorsed Bitcoin’s legitimacy in general, it indicates that they want to have a role in ensuring that Bitcoin’s ascendence does not interfere with the proper functioning of the economy and financial markets. Furthermore, the aspect of regulation is still unclear and still being debated. Therefore, we don’t believe there will be a clear outcome over Bitcoin’s role soon as a regulated asset class. Hence, any adverse near-term developments could introduce additional volatility in Bitcoin’s price movements.

Is Bitcoin a Buy, Sell, or Hold?

We are long-term bullish on Bitcoin, and we don’t trade in and out of the asset regularly. We have used deep retracements like this to add to our Bitcoin positions. We had also reduced our exposure at the $65K resistance level, selling into strength. But, we were always ready to increase our exposure when presented with an attractive opportunity. And we think the opportunity has presented itself again.

We continue to add exposure to the asset over time. There’s no need to rush. The time to rush in had long gone when Bitcoin was less than $10. There are also other currencies like Ethereum and alternative coins to consider to diversify our crypto holdings. We view BTC as a long-term asset that we don’t intend to trade in and out regularly.

Moreover, the bear-trap level from May to July continues to be a critical level of support. So, we have also kept our funds ready if the market makers are keen to bring BTC-USD back to those levels. However, if it does, we will increase our exposure more aggressively as we think those levels are likely to hold.

Consequently, we revise our rating from Neutral to Buy on Bitcoin.