On Friday night the price of Bitcoin dipped below $7000, with many proclaiming that the “crypto bubble” has popped. And given all that we have seen in crypto space over the past year, it's a legitimate reaction.
Yet what remains more important is whether or not that reaction is ultimately correct.
Certainly if you paid $20,000 for a Bitcoin, or bought any of the other tokens near their highs, the current prices are significantly lower. Yet keep in mind that only a year ago you were able to buy a Bitcoin for $1,000, and those who did so are still up sevenfold on their investment. So while prices are well off the highs, it’s not as if the entire market has gone away.
It’s also worth considering that while we certainly feel the impact of the price swings, they're not always entirely reflective of the underlying developments. The crypto space has a market cap that has hovered between $200 and $600 billion, while the approximate value of the world’s stock markets is around $76 trillion. So keep in mind that we are talking about a relatively small market that can move significantly when money is flowing in and out.
In one of Arcadia's recent Monthly Market Snapshots I wrote the following when Bitcoin was around $16,000:
“Perhaps a simple way of looking at it is that if we’re only at a 1% adoption rate, and this is the future technology the world is going to need, prices are going up.
Keep in mind that view is based on those assumptions playing out. I feel as if they will, and should that occur, even at current prices, having cryptos in your investment portfolio will pay off.
Is it possible that Bitcoin drops back down to $10,000? $7,000? Even lower? Absolutely. And if nothing else, if you are going to get involved in the cryptos it’s essential to be prepared for extreme volatility.”
With that said, I mentioned then and continue to feel now that while there is going to be a lot of volatility in the short-term, ultimately the long term will be decided by how useful the technology is and how much it is adopted. Because regardless of what today's prices are, if crypto technology is providing the infrastructure for what will replace the dying dollar system, the value of cryptos will necessarily have to rise.
In recent months we've seen significant stock market selloffs as interest rates have risen. In the past week yields have declined somewhat, but should the Fed continue to raise rates while backing away from its quantitative easing balance sheet, there's significant reason to believe that there could be further declines in stock market.
And one way of thinking about it is that with the world stock markets around $76 trillion while the current market cap of the crypto space is around $250 billion, if even 1/76th of the money in the stock market left and went into cryptos, that would result in a quintupling of the market.
So while the price action is relevant, it’s also worthwhile to keep an eye on the actual adoption. Because that's what's really going to matter in the long run.
There continue to be rumors of Starbucks (NASDAQ:SBUX) and/or Amazon (NASDAQ:AMZN) adopting cryptos as payment. Which in the event either should occur would certainly provide a much more visible presence to those who still know little about cryptos. Such a move would also have the potential to rapidly increase the overall implementation of the technology.
In terms of adoption that’s already taking place now, consider the following links:
-BIG 4 (BTC, ETH, XRP, LTC) To Gain In Adoption Of Crypto In 80,000 European Stores
-Why This Billionaire Just Made a $500 Million Bet on Blockchain
-JPMorgan Says It May Have to 'Adapt' to Counter Crypto Adoption
-Kik App Partners With Unity Technologies To Improve Adoption Of Kin Cryptocurrency
-Regulations Will Enable The Global Adoption of Cryptocurrencies
-Bitcoin ATM Installations Skyrocket Throughout Market Correction
I continue to feel excited about my crypto investments and like buying at the current levels. Which may not be suitable for everyone. Yet keep in mind that cryptos can still represent a valuable part of a portfolio. With "part" being the key word there.
Because you don’t have to necessarily take everything you own and load up. A portfolio allocation of even 1-5% can provide an excellent means of diversification, especially should the current system continue to decline.
Can I or anyone else say for sure what will happen in the world? Of course not. But trading is a science of probabilities, and when I think about the potential weighted outcomes, it still makes sense to me for most portfolios to have some crypto exposure.
After all, it's not as if any of the problems with the U.S. debt have been addressed. In fact as the debt has crossed $20 trillion, now the budgets are already forecasting it will hit $30 trillion by 2028! All while signs that the current bubbles in the stock, bond, and real estate markets might be teetering continue to emerge.
So let's say there is some probability that cryptos are bubble and stay at current levels or even go substantially lower.
There's also some probability that the paper markets crash and a lot of money is looking for a new home and flows into crypto space. And as I roughly detailed above, if any significant amount comes out of the stock, bond, real estate markets and goes into cryptos, we could easily see exponential gains. Much like what was witnessed in 2017.
But let's use a simple example to make it even more clear.
Let's say that there is a 50% chance that cryptos go to zero, and a 50% chance that the scenario just outlined occurs. To pick a specific coin to use, let's consider Litecoin, which is currently trading around $120.
Some simple calculations might look like this.
50% x $0 Litecoin
50% x $600 Litecoin (using the 5x multiple mentioned above as a reference)
Resulting in a weighted average price of $300. While it currently trades at $120.
Obviously the 5x multiple is somewhat arbitrary. Although I would say conservative should you have an event like Starbucks or Amazon accepting Litecoin as payment. Especially since at its highs Litecoin has already traded near $400. Of course there are also many who believe that the true value of Litecoin is substantially higher then either of those numbers.
With the point being that there is a skew to the bet. Especially if the technology is implemented and adopted at an increasing rate.
Of course there is risk to any investment, but if you make enough bets with the odds and skew in your favor, that's a good way to come out ahead in the long run. Which given the unusual nature of today's financial markets, is the way I continue to approach this environment.
So if you're holding cryptos and not feeling so good about the price being lower, consider that all of the reasons you likely invested in cryptos in the first place are still largely intact. While all of the reasons that money is flowing out of the fiat debt-based system are also intact.
Which means one thing that we can be sure of is that the future price action of the cryptos will be exciting to say the least. And personally I continue to feel that we will see new price highs well before the year is done.