Why Bitcoin Is Falling, And What It Means

Is Crypto the new greed-fear indicator?

Cryptocurrencies are the new “golden child” in some investing circles. Bitcoin is the new hot commodity so to speak. But is it new revolution, or just a new signal of market speculation? The answer may be both. Let’s explore this.

In the aggregate, the market seems to have made some temporary conclusions about Bitcoin. To be clear, this is an evolution. As Bitcoin and crypto as financial instruments take on a life of their own, I see a recent pattern.

Bitcoin is behaving as a proxy for taking investment risk. In other words, its price is being driven not by fundamental value, but by folks on the hunt for a near-term profit. How else do you explain the gyrations of the past few years?

After all, this is alleged to be akin to a currency. The only currencies whose values hop around like Bitcoin are from emerging nations in the 1970s. That is, where the only consistent thing was instability.

Bitcoin was at one point rationalized as the new gold. In other words, it was where investors fled when they wanted something physical and solid, when they lost faith in traditional, government-backed currencies.

Below is a chart of 3 investments: The Nasdaq 100 Index, an ETF (symbol GBTC) based on the movement of the price of Bitcoin, and a gold ETF.

But Bitcoin and gold have been travelling in opposite directions more than they have been in sync. This is different from in the past. And it adds to the case that Bitcoin is its own animal, one driven more by speculation than fundamental or even “flight to safety” factors.

Lately, Bitcoin is acting much more like a leveraged stock ETF than a currency, or a successor to the global banking and “fiat currency” system that some claim it will be. But that doesn’t mean it isn’t a useful consideration for some portfolios.

If you have the risk tolerance (and that’s up to you, not anyone else), Bitcoin’s pros and cons are clear. The pros are evident from some of the temporary price gains. The cons are that it moves like you might expect a new-era, heavily-hyped but potentially valuable asset type to move – with high volatility, and based on factors that are difficult to put our fingers on.

I think that for now, Bitcoin and other cryptocurrencies are destined to remain as-is: they are proxies for the market’s desire and willingness to take on big risk to pursue big return, especially over short-term periods of time. In that respect, it is something that can be considered as part of whatever set of high-volatility, tactical assets you consider within your research process.

Just do not be fooled: Bitcoin is not a panacea. It’s a trading vehicle, at least for now. And its recent hints of at least a temporary price top, after a strong rally, is likely an indicator of market risk-taking pulling back as well.

Comments provided are informational only, not individual investment…