Bitcoin winter is done and gone and Bitcoin has risen from the depths of $16,000 each to about $120,000. Folks are talking about Bitcoin heading toward $1.000.000! this sounds really good for anyone holding Bitcoin or invested in a Bitcoin ETF but how safe is the senior cryptocurrency really? Afterall, there was a tremendous amount of hype running up to the Bitcoin crash as well as a lot of illegal shenanigans before the price fell off the cliff.
Are Bitcoin’s Problems All Gone?
We recently heard a pundit on Bloomberg saying that the problems of Bitcoin are cleared up and that Bitcoin has the backing of the current administration. The pundit went on the quote the prediction of a million-dollar-Bitcoin. It got us to thinking about things like Bitcoin wash trading which appears to be still going strong. This is an issue that may not affect you on a daily basis if you bought Bitcoin and are holding or if you are buying and holding in a Bitcoin ETF. But, this practice tends to inflate the price of Bitcoin short term which can be a problem for anyone getting into Bitcoin and when they think a rally is in the offing and then finding that they left holding the bag as the price corrects back to a normal market range.
What is Bitcoin Wash Trading?
With wash trading a trader sells an asset like a stock that has recently lost value and then almost immediately buys it back. In the stock market this happens because the trader or investor wants to take a capital loss on an investment in their tax return. They buy the stock back at what has now become a bargain price. The IRS does not allow this practice to result in the desired tax-profit result. In the world of Bitcoin folks do this to manipulate the market. Other traders see a big increase in trading volume and then incorrectly anticipate a run up in price which does not happen. They buy Bitcoin only to see the price fall.
Can Bitcoin Winter Return?
People buy Bitcoin because they believe it will maintain its value versus the dollar or go up. When enough people believe in Bitcoin its success is assured. When its price falls due to any number of factors it may come to a point where investors start bailing out and when the bailouts grow sufficiently Bitcoin’s fall becomes a self-fulfilling prediction. That is roughly what happened during crypto winter. Many who held Bitcoin had joined the ranks like folks did with dot com stocks back before that crash simply because they thought they were getting in on the wave of the future. This sort of market euphoria is commonly seen before market crashes. Because Bitcoin does not have aspects that on e can use to assess intrinsic value loke with a traditional business, real estate or a stock, it may be all too prone to exhibit a boom or bust prices. That does not mean that Bitcoin is a bad or dangerous investment but rather that investors need to be aware of what drives Bitcoin prices and realize that many who are predicting the next great leap in Bitcoin price are, in fact, folks with money in Bitcoin who expect to become richer if more folks pile in and drive that price up.
Bitcoin Trading Versus Investing
No matter what price range Bitcoin trades in, day traders can make money on Bitcoin when they correctly anticipate the upward and downward price movements of the cryptocurrency. Day trading can be done using technical analysis signals just like one does with stocks. The market will tell the trader what it will do next if the trader learns to us technical analysis tools. If, on the other hand, you want to invest in Bitcoin you will need to find tangible aspects of Bitcoin in order to more accurately predict its future course. The one solid aspect of Bitcoin that supports its ever-higher price is there eventually there will never be more than 21 million of them (there are 11,900 of them today). Unlike stocks Bitcoin does not pay dividends or have a business with profits that you can analyze. It is more like a commodity like gold, oil, or winter wheat but one that has an absolutely defined known final quantity. Thus if folks keep wanting to buy Bitcoin over the years its price is destined to go up according to Bitcoin promoters. Over the long haul successful day traders can make more money than investors even when trading a stagnant asset. Sadly they can also lose money more quickly.
The Risk of Bitcoin
Bitcoin is an asset and a crypto network. It was invented to be a means of exchange over the internet. However, it became the subject of repeated speculative frenzies. Here is where the Bitcoin risk lies. It has no fundamentals to fall back on except for eventual limit of how many are created. Thus any investor needs to realize this and buy according with their eyes open.