There are two basic ways for investors to take advantage of Bitcoin as a store of value. One is to buy BTC and hold and the other is to try to time the market and thus buy and sell at profitable price levels. The first approach was ideal for the first years of Bitcoin’s existence and the second created impressive profits (and losses) in the last several years. Bitcoin’s price swings up and down from the start of 2021 to the present gave traders many opportunities to profit even when the long term value of Bitcoin ended up falling. In crypto winter Bitcoin became less volatile and fell by price plateaus. How volatile will Bitcoin be after crypto winter is over? That will largely determine the best way to approach Bitcoin investing.
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Buy Bitcoin and Hold
Buy and hold turned out to be an exceptionally good strategy for those who had the foresight (or luck) to buy BTC tokens when they were less than a dollar and then hold on until they were valued in the tens of thousands of dollars. The mantra of long term Bitcoin owners is to hold on for dear life as prices swing up and down. This approach has generally worked for anyone whose original tokens cost a few cents each. The problem for anyone who got into Bitcoin after the 2017 runup in prices was that they may have bought into the hype at a market peak and then seen their Bitcoin valuation in dollars plummet. With two new huge peaks in value in 2021, Bitcoin promoters were able to say that it was clear Bitcoin would always soar in value and you only needed to wait to see the next peak. Much of that optimism or hubris evaporated during the Post-2021 crypto winter when crypto businesses went bankrupt and investors lost as much as three-fourths of their investment in Bitcoin. Anyone who believes in buy and hold for Bitcoin is hoping that the recent price resurgence lasts.
Bitcoin Trading for Recurring Profits
The rationale for trading a stock, commodity, foreign currency, or cryptocurrency instead of owning and holding is that there is more profit potential in all of the price swings of a volatile asset (like Bitcoin) than there is in the long term appreciation of even the most impressive growth stock or crypto token. And, when a tradable asset becomes mature it tends to fluctuate in price but not grow much at all. Just looking at the last year in Bitcoin from March 2022 to March 2023, the top price was $47,000 at the beginning of the time period, the low was $15,757 and the current price is $27,835. The point being even during crypto winter there were profits to be made and especially since the first of 2023 as Bitcoin has gone up by about 80%. Anyone who trades Bitcoin by jumping in at low prices and selling when the price goes up is probably cheering for a resumption of the days of extreme Bitcoin volatility.
Bitcoin Confidence Versus the Economy
Positive market sentiment commonly drives up tradable assets like crypto or stocks beyond what they would be worth in a rational market. Bitcoin confidence did this in 2021 and before and then the economy slumped with inflation, higher interest rates, and a falling Nasdaq market (which Bitcoin tends to follow). The rising confidence in Bitcoin in 2023 seems to be based on the assumption that the US Federal Reserve is done raising interest rates which may or may not be true.
Regulation and Bitcoin Volatility
Part of the volatility issue with Bitcoin is likely due to the high level of wash trading. This is when a trader sells Bitcoin and immediately turns around and buys again at basically the same price. Folks do this for one of two reasons. The first is that they have lost money in Bitcoin since they bought at the peak in November 2021 and want to take the capital gains loss on their taxes but they believe Bitcoin will go up again so they want to stay invested. The other is that they are manipulating the market in an attempt to make there seem to be more interest in Bitcoin trading than there really is. This is illegal in the stock market and the IRS does not allow capital gains write offs on taxes in this case. In all likelihood, there will be substantially more regulation on the crypto space going forward and any Bitcoin volatility that is directly related to wash trading is likely to be severely reduced.
How Volatile Will Bitcoin Be After Crypto Winter? – SlideShare Version