Bitcoin is blasting off and looks poised to retest its previous high of $20,089 set in December 2017. However, there are some key differences between this bitcoin bull market and the previous one that increases the chances that bitcoin has more upside in the short and long-term…
(source: Yahoo Finance)
One of the biggest differences is that institutional money is heavily participating in this bitcoin move. This increases the likelihood that this rally will not roll over and give up the bulk of its gains like it did in 2018.
Institutions tend to buy assets for fundamental reasons and hold for the long-term. Compared to 2017, there are now many vehicles for institutional investors who want to invest in cryptocurrencies, including CME futures and an ETF.
Another recent development helping to fuel the demand for cryptocurrencies is the acceptance of Bitcoin by fintech juggernauts, Square (SQ), and PayPal (PYPL). Hedge fund Pantera estimates that in the past 2 years, Square users accounted for 40% of bitcoin that entered the market, and in just the past 3 weeks since Paypal launched its crypto feature, their clients have purchased about 70% of the new supply of bitcoin.
Reasons to be Bullish Long-Term
While the demand for bitcoin is surging, the supply is relatively fixed. This makes bitcoin an attractive option, especially as we are in a period when the monetary base is exploding.
Typically, investors buy gold when they are concerned about the inflationary effects of the dovish monetary policy. However, gold’s traditional role as a monetary safeguard may be better served by bitcoin, especially since bitcoin is much more convenient, transferable, and divisible.
Countries all over the world are experimenting with a combination of low-interest rates and massive deficits. This combination of fiscal and monetary stimulus will likely lead to inflation. Therefore, bitcoin demand will rise as people will look for an asset that can’t be diluted to store wealth. US-based investors haven’t dealt with significant bouts of inflation in decades, however, the story is different in countries with a history of inflation like Argentina, Venezuela, or Turkey. In these countries, bitcoin has already become an integral part of their financial lives.
As crypto becomes increasingly mainstream, it could also become an asset class with a weighting in portfolios. We can see evidence of the institutional involvement in bitcoin through open interest and volume on CME futures.
Short-Term Reasons to be Bullish
While these are longer-term factors, in the short-term, conditions are ripe for a significant squeeze in bitcoin prices. New highs attract interest from fast-money traders who are always looking to buy breakouts. Additionally, money is rapidly moving into Grayscale Bitcoin Trust (GBTC), a bitcoin ETF.
At the beginning of August, about 400 million shares were outstanding of GBTC. Today, 555 million shares are outstanding. This means over the last four months, GBTC has bought an additional 147,000 bitcoins. This is a significant amount given that there is an estimated 7 million bitcoin with about 1 million “freely floating”.
The most obvious way for investors to take advantage of this unique situation is by buying GBTC. However, investors may also want to consider stocks with crypto exposure like Paypal (PYPL), Square (SQ), and Silvergate Capital (SI).
Bitcoin is up more than 40% since Paypal’s announcement in late-October that it would allow its users to buy crypto from their Paypal accounts. This instantly created another 300 million potential buyers into the fold.
Early indications are that Paypal users are getting involved, as volume from Paypal’s crypto broker-dealer (itBit) has spiked significantly. PYPL makes a commission from each crypto transaction. The move is also a way to attract users to its platform.
PYPL’s stock is about…
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