Since November 2021, Bitcoin is up more than 120% year-to-date. Bitcoin fundamentals and the current economic situation begs the question whether Bitcoin is still a bargain. Bitcoin has seen a significant price surge in the past month, jumping from around $12,000 at the end of Q3 last year to over $60,000 (November 2021). The trend towards the above $50,000 price region has led many to speculate that the underlying cryptocurrency may be very expensive right now, and the train has already left the station. But given Bitcoin's pre-programmed deflationary mechanism and several macroeconomic factors, the price of the asset may (still) be cheap in reality.
Some facts about the size and market capitalization of Bitcoin
As of this writing, the total market cap of Bitcoin is nearly $1.22 trillion, while the total market cap of cryptocurrencies is $2.82 trillion. The earlier high was more than $800 billion at the height of the crypto bubble of 2017. To reach a new record high in 2021. In contrast, all gold in existence is worth $12 trillion (11 times Bitcoin), while the 2,000 billionaires in the world alone It's worth $8 trillion.
The stock market is worth about $100 trillion. Some still say that the Bitcoin market cap is overvalued, however take note of the numbers above when considering how small this market is compared to other types of investments.
Bitcoin market cycles historically
In examining Bitcoin's relatively short history of just over a decade, one can discover several key excerpts.
For example, it can be said that Bitcoin is volatile, as Bitcoin has seen a double percentage of moves in a matter of hours and sometimes minutes. Despite several significant price declines, the increases have been more pronounced, and Bitcoin has become the best performing investment asset over the past decade with a return on investment of 8,900,000%. Aside from strong price movements in the short term, Bitcoin also tends to move in more comprehensive cycles.
According to one theory, the underlying cryptocurrency moves in so-called expansion cycles. Meaning that each cycle is longer than the previous one. So far, three cycles have been completed, the latest of which coincided with the end of the 2017 bull run when Bitcoin topped nearly $20,000. Then came a prolonged bear market as the largest cryptocurrency fell to $3,100 a year later. However, this massive drop started the fourth and current expansion cycle, which should end in late 2022. This theory suggests that when it ends, Bitcoin could reach $100,000. As such, the current price does not seem too expensive.
Bitcoin basics in today's economy
Since supply and demand are the two most influential factors in the pricing of digital assets, it is worth defining some features of Bitcoin. Because it was created during the recent financial crisis in which global governments began printing money on a large scale, author Satoshi Nakamoto decided to supply Bitcoin in the exact opposite way. Instead of having an unlimited supply, Bitcoin has a pre-programmed number of coins at all, estimated at 21 million. In addition, the rate at which new digital currencies are created is predetermined and does not depend on a central authority (eg government or central bank).
After an event called the halving that happens roughly every four years, the network halves the number of new bitcoins created. By doing this, the supply of bitcoin actually decreases over time, which ultimately reduces inflation rates. At the same time, as the world witnessed during the coronavirus crisis, governments can print excessive amounts of fiat currency, which not only devalues other currencies and asset classes, but can increase inflation rates. Meanwhile, banks offer 0% interest rates on deposits and even go into negative territory in some countries.
According to experts, this is another bullish factor for Bitcoin, which indicates that the price may remain cheap. Robert Kiyosaki, author of Rich Dad Poor Dad, recently stated that only the rich will be able to afford Bitcoin once they realize that Bitcoin is growing more valuable as the Federal Reserve prints trillions of US dollars.
Bitcoin and price volatility
Although Bitcoin has increased in value by more than 60% since the beginning of the year, the asset has also seen some significant price drops mentioned above. In mid-March 2020, during the most severe days of the Corona pandemic, Bitcoin fell by almost 50% to below $4,000. Such strong price developments can scare off investors and scammers or provide tempting opportunities to buy the dip. However, knowing that this is indeed a pullback and being able to time it perfectly to maximize the best possible entry point is somewhat challenging, to say the least. Thus, applying the popular dollar cost averaging strategy may be the best solution.
The DCA strategy allows investors to average the entry price by buying specific parts within a specific time frame. For example, one might decide to buy $100 worth of bitcoin on the same day every month. Time has shown that DCA is a successful strategy. According to recent research, even if investors are hiring
DCA $1 a day top $20,000 in late 2017, their position would be 120% higher today.
"HODL" and risk management
As mentioned above, the market cannot be timed correctly. Another strategy to consider is the "HODL" storage and retention methodology. Those who believe in bitcoin insist that it will increase in the long run. Hence, they hold it and do not sell despite the phases of the market cycles. After all, most of us have not been traders since childhood, especially cryptocurrency traders.
If you want to store and keep “HODLing” funds, this means that the funds can only be extracted after achieving the set goals. So if you plan to use this money to pay your mortgage or need it, don't invest it in Bitcoin. Invest only the amounts that you can fully afford to lose. Bitcoin could go to zero (it could also go to $1 million). If you can't sleep, thinking that your investment in cryptocurrency is down 80%, then you're investing too much and should lighten up.
How do investors deal with bitcoin volatility?
During times of economic uncertainty, investors begin to look for possible, and sometimes unconventional, assets to protect and even enhance their savings.
While central banks print lots of cash and risk raising inflation levels, Bitcoin offers a deflationary approach pre-programmed with a cap of 21 million coins and a supply cut every four years.
The underlying cryptocurrency seems to be in cycles already, and its advantages are working against the rest of the market.
In theory, this should lead to increased demand in the following months and years.
Adding in the diminished supply due to the halving, this could (again in theory) drive the price higher, making Bitcoin look like a bargain to buy today.
Or as Gemini co-founder Tyler Winklevoss put it recently:
"This is still just the first half"