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Why Is Bitcoin Stuck in a Holding Pattern?


Dec. 9 2019, Updated 3:58 p.m. ET

If there’s one thing critics and fanatics can agree on when it comes to Bitcoin (BTC-USD), it’s the volatility factor. The moves are big, and timid investors need not apply. That’s one of the chief reasons why I caution traders not to mortgage their houses to buy bitcoin or any other cryptocurrency. The wild moves from less than a penny to nearly $20,000, then back to $3,200, then back up to $13,500, and then to $10,000 all happened within ten years.

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In other words, this isn’t a “safety investment” like Disney (DIS) or McDonald’s (MCD) stocks. How does bitcoin work? It’s an irrepressible asset that behaves like a penny stock on steroids. But it’s not a company. It’s a currency, a grassroots movement—and possibly the future of money. No one owns it, yet it belongs to everyone. Confusing enough for you?

How we got to the Bitcoin era

Media pundits had no misgivings about criticizing bitcoin and other cryptocurrencies during the horrendous 80% crash that followed the bubble-icious 2017 bull market. Regulators also took their shots. China banned initial coin offerings. And, more recently, Congress grilled the Libra Project’s David Marcus as if he were a criminal.

2018 was a horrendous bear market for bitcoin, and cryptos generally, because of the deflating ICO bubble. Too many startups crowded into a space that was, and still is, trying to find its place in the global monetary regime. Everybody and his uncle had an ICO, and nearly all of them failed, vanishing investors’ capital without a trace.

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Those problems and all the regulatory scrutiny were enough to threaten Bitcoin’s very existence. By the time it had reached the $3,000s, people were comparing cryptocurrencies to tulip mania. Soon enough, however, powerful corporations and institutions would enter the crypto space. JPMorgan (JPM) proposed JPM Coin, Walmart (WMT) got a patent for “a digital currency,” and of course Facebook (FB) has its upcoming Libra Coin.

Even as retail traders hesitate, corporate adoption has been swift. AT&T (T) has proudly become “the first major U.S. mobile carrier to provide a cryptocurrency payment option to customers.” Meanwhile, New York Stock Exchange parent company ICE (InterContinental Exchange) is set to launch a groundbreaking Bitcoin futures exchange aimed at large-scale institutional investors.

All this has evidently been enough to bring bitcoin prices back to five digits. Prices have been hewing closely to the $10,000 level since mid-August. It’s as if the tug-of-war has come to a complete standstill. The institutional “whales” seem to be waiting for the next developments before making their next move.

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The only constant thing is change—and that’s okay

I can’t blame them for halting at the current level, as the last thing we needed was another bubble in bitcoin. If they had taken it to $20,000 again, another shakeout would have been almost inevitable. So I think it’s highly encouraging that the cryptocurrency market is taking a breather and consolidating.

More than anything else, I suspect the big corporations and institutional investors are watching to see how the Libra Project pans out. Remember, the Libra rollout could expose 2.8 billion Facebook, WhatsApp, Instagram, and Snapchat (SNAP) users to cryptocurrency. The Libra Coin could therefore be even bigger than Bitcoin. But higher awareness of cryptos should also benefit bitcoin prices.

Bitcoin is also waiting, I imagine, to see the dollar’s next move. Retail traders often forget that bitcoin’s stated price is typically measured against the US dollar. But large-scale investors are undoubtedly watching the dollar’s movements closely. And it’s been in a strong bull market for a year and a half now.

I don’t expect the dollar’s bull run to last for too much longer. But the institutional investors will want to see the dollar roll over before allocating more capital to cryptocurrency, which is a direct competitor to the dollar and other fiat currencies. And again, they’re waiting to see how the Facebook-versus-regulators battle plays out before taking a bigger stake in crypto.

One thing that’s certain is the inevitability of change, which is rapid in the wild world of cryptocurrencies. For now, the best we can do is place our bets and watch the Bitcoin story unfold.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.


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