All markets have a bag of tricks that they use to lure traders in and out at the wrong time. Head-fakes are among the most obvious tricks, but commentators often ignore long periods of sideways price action. That’s what Bitcoin’s doing now, and it may be the market’s most devious trick yet.
Nowadays, sharp price drawdowns don’t dissuade retail traders from buying assets anymore. People see the Federal Reserve buying toxic junk-bond ETF’s and volatile corporate bonds, so they buy “bankruptcy stocks” like Hertz, Whiting Petroleum, GNC, and Chesapeake Energy.
And of course, quick share-price rallies continue to draw folks into assets even if they’re overpriced. High-flying electric-vehicle stocks like Tesla and Nikola have lured traders in, and they’re perfectly fine companies but we can see the markets setting the price chasers up for a hard fall.
The media likes to report on the swift moves but you don’t hear much about the market’s most insidious trick: manipulating an asset into a tight range and keeping it there. Bitcoin’s exhibiting this type of behavior now, and that’s why you haven’t seen much mainstream coverage of cryptocurrency lately.
Some investors have also been shaken out of their positions in Bitcoin, and that’s really a shame. Perhaps they were seeking excitement in the Bitcoin trade, but profitable investing isn’t always a roller-coaster ride. Periods of consolidation are a necessary part of the process.
Courtesy: TradingView
And in the case of Bitcoin, the consolidation period is a sign that the cryptocurrency market is healthier and more stable than it’s ever been. Some folks were freaking out about the Bitcoin halving event in May, but here we are and everything is just fine.
The problem is that too many traders have the wrong expectations for cryptocurrency investing. Some folks didn’t really stop to think that when you buy Bitcoin with dollars, you’re effectively betting that Bitcoin will increase in value and/or the dollar will decline in relative value.
You can count on the second part of that equation coming true as the United States is in an ongoing currency war with China and the U.S. government is fighting that battle by keeping the dollar as cheap as possible. So if you’re betting that the dollar’s relative value will deteriorate, that’s a fairly safe assumption to make.
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However, this isn’t a quick, one-time event; it’s more of a process that will happen over time. That’s why a buy-and-hold strategy makes sense if you’re willing to wager that an anti-inflationary asset like Bitcoin will hold its value better than fiat money and U.S. dollars in particular.
With the Fed authorizing mega-scale money printing to buy unprecedented quantities of assets, expecting the value of the dollar to go down is perfectly reasonable. The onset of the coronavirus crisis has only served to confirm this thesis as the Fed is now cranking up the printing presses and buying practically everything in sight.
The chart below shows that whereas in September the Fed’s balance sheet was below $4 trillion, Covid-19 provided a handy excuse for the Fed to expand its balance sheet to more than $7 trillion:
Courtesy: St. Louis Fed
There’s nothing boring about that chart, but not enough cryptocurrency investors are paying attention to the data that really matters. Again, there are two parts to any currency trade: if you purchased Bitcoin with dollars, then you should pay attention to the factors that influence both of those currencies.
Plus, you’ll want to stay informed about what’s going on internationally since Bitcoin is designed to be a universal currency. For instance, the Supreme Court of India overturned the nation’s banking restrictions for cryptocurrency exchanges this year.
That’s a potential game changer as India’s population dwarfs that of the U.S. and furthermore, India’s emerging middle class isn’t averse to using cryptocurrency. Indian economist Subhash Chandra Garg even went so far as to predict that a “digital rupee will replace physical paper rupee as currency” in that country.
The history of cryptocurrency, and particularly Bitcoin, shows that price appreciation is the reward for patience. There have been quiet periods before, and they generally ended with big moves. So, don’t let the market use its dirtiest trick against you – boredom, rather than an inconvenience, can actually be a trader’s best friend.
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