As troubles in the traditional banking sector grow, bitcoin is benefitting, and risk sentiment has turned bullish on the once-beleaguered coin. Starting 2023 at around $16,600, the bitcoin price has risen a dramatic 70% and now sits around $26,969 as of 28 March.
One of the primary drivers of the recent rise in bitcoin price is the goldilocks market regime that appears to be developing. Inflation in the US has fallen from a peak of 9.1% in June 2022 to 6.0%, and consequently the Fed has been able to slow its rate hikes. Markets are pricing rate cuts for 2023, and this is bolstering risk assets such as equities and crypto. Crypto has also already priced in a lot of bad news recently, leaving the way open for upside moves.
Before the early 2023 bull run, bitcoin was having a miserable time. This was due to several events, both crypto-specific and part of the broader macro backdrop. You can see the current BTC price on the chart below and its historical progress through 2022.
A significant event to negatively impact the BTC price was the spectacular collapse of crypto exchange FTX. Bitcoin had traded in a tight range between $18,500 and $20,000 during September and October 2022. However, it fell 26% as news of the collapse emerged, and the coin has only just recovered past those levels.
Moreover, there are ongoing fears that the effects of high inflation and rising interest rates will plunge the world into a recession. Our recession probability indicator remains over 70%. Bitcoin is yet to experience a serious global recession, but we expect one would limit any potential upside in price action. This is because during times of economic uncertainty and weak growth, investors may be more inclined to sell risky assets like bitcoin and seek safer investments such as government bonds.
One exercise is to see how low prices could get were the NASDAQ to suffer a 2000-style crash. After all, earlier in 2021, the bitcoin and NASDAQ correlation reached highs of almost 80%. So where the NASDAQ went, bitcoin followed. The correlation has declined recently, but should it rise again, the historical drawdowns of NASDAQ could be informative.
Back in 2000, the NASDAQ suffered a 78% drawdown. As of November 2022, the NASDAQ is in a 27% drawdown. A repeat of the 2000-style drawdown would put the NASDAQ at 3,500. So where would crypto be if NASDAQ were trading at this level We estimate a regression between bitcoin/ethereum returns and NASDAQ returns from 2020 onwards. Based on this relationship, we find:
Regulation is becoming more of a theme throughout 2023, with various executive orders signed already. Increased regulation should mean less uncertainty around crypto markets for investors, which would be bullish.
We think bitcoin is a worthwhile long-term investment. However, we also note that bitcoin is extremely volatile. That means it experiences large price movements over short periods. Before investing, you must understand the risks involved: you could lose all or a large portion of your investment. Never invest money that you cannot afford to lose.
However, to invest in cryptocurrency, we must first understand it. Crypto tokens are unlike any traditional asset class. And they are all different. Just because you understand bitcoin, does not mean you know how ethereum works. Our video on bitcoin fundamentals can help you understand how bitcoin prices fluctuate and how to assess trends in important bitcoin metrics.
We think crypto markets are a worthwhile long-term investment. The technology can capture market share on some existing markets like payments and stock trading while creating new markets like valuable scarce digital assets.
We suggest paying attention to the long-term macro backdrop when asking yourself, should I buy bitcoin right now Your exposure to bitcoin needs to be appropriately sized so that you can survive 50% to 80% drawdowns. Drawdowns provide good entry levels for exposure, but we would not go max long in an environment of rising central bank rates and falling global growth momentum.
Cryptocurrencies can be extremely volatile. One way to cope with the volatility is to use dollar-cost averaging. Dollar-cost averaging is a strategy where you divide the total amount you want to invest across periodic purchases of the target asset. It simply means that you would invest the same number of dollars each month or quarter, regardless of market trends.
The idea is that when prices are high, you can afford less of the asset. But when prices are low, you can afford more. When the market recovers, you benefit from having bought more shares at the lower price. Please note that using this strategy will not always result in a profit or necessarily protect you from falling prices.
For trading bitcoin over the next two to four weeks, we are slightly bearish. That means we expect falling prices. However, we think bitcoin is a good long-term investment for the next one to three years and are bullish overall. That means we expect prices to rise in the long term.
As with all investments, the value of bitcoin can rise as well as fall. While it is unlikely that bitcoin will suffer a complete loss of value, investors must be prepared to suffer drawdowns of between 50% and 80%. We recommend small allocations and diversification of your portfolio. Never invest what you cannot afford to lose.
Traditional wisdom says you should buy low and sell high. But whether you should sell bitcoin depends on your investment horizon, risk appetite and financial goals. Although some websites speculate that certain days of the week are better or worse than others for selling bitcoin, we believe that any decision to buy or sell should be based on an analysis of crypto fundamentals.
We think some cryptocurrencies like BTC and ETH are a worthwhile long-term investment. However, they are also extremely volatile. That means large price movements over short periods are common. Before investing, you must understand the risks involved: you could lose all or a large portion of your investment. Never invest money that you cannot afford to lose.
Smart contract platforms: after bitcoin, the big innovation was to have blockchains that were more programmable. These could host smart contracts or decentralised applications and have allowed the emergence of the metaverse and defi. Ethereum (ETH) is the most popular version of a smart contract platform. As well as ethereum, we also include some key competitors. The constituents of this index are: Ethereum (ETH), Cardano (ADA), Avalanche (AVAX), Solana (SOL), Fantom (FTM), VeChain (VET), Terra (LUNA), EOS (EOS), and Chainlink (LINK). We also include Polkadot (DOT) which allows interoperability between blockchains and the use of smart contracts via parachains.
Decentralised Finance (DeFi): financial services built on top of blockchain networks with no central intermediaries. This can be a broad category, so we narrow this down to platforms that focus on lending/borrowing, yield farming, automated market making and decentralised exchange tokens. The constituents of this index are: Aave (AAVE), Compound (COMP), Uniswap (UNI), Yearn.finance (YFI), Loopring (LRC), PancakeSwap (CAKE), Maker (MKR), 1inch (1INCH), Thorchain (RUNE), and Terra (LUNA).
Think of trading as the exchange of assets between a buyer and a seller. Then we can call a trade order an instruction to exchange an asset like Bitcoin for another asset at a specific price or price range. Furthermore, all trade orders are either buy or sell orders since all traders are buyers and sellers.
The simplest type of trade order is a market order. Market orders are usually placed by traders if they want to be certain a trade is executed. A market order is instant. Therefore, it is simply an order placed by a trader to buy or sell an asset like Bitcoin immediately at whatever its current price is.
While a market order is simply an order placed by traders to buy or sell an asset immediately at whatever the current price, a limit order in its most basic sense, is an order to buy or sell an asset at a specific price. Limit orders are placed with the purpose of limiting price risks.
Example of a limit order: the price for BTC/EUR is currently at EUR 9,000 and you place a limit buy order for a limit price of EUR 8,500, then your order is meant to execute at the price of EUR 8,500 as soon as there is a matching sell order at this price or better.
Let's say a trader wants to buy Bitcoin at a specific price. The trader would place a limit order for Bitcoin at that particular price. For example, if the Bitcoin price falls down to EUR 9,000 and the trader would like to buy 1 Bitcoin (BTC), the trader sets the limit price to EUR 9,000. On the other hand, if the trader would like to sell when Bitcoin reaches EUR 10,000, then the limit price should be set to EUR 10,000 on the sell side.
It is important to note that if the price is set higher than the current price for buys or lower for sells, it may result in an immediate fill as there is a better price available than the limit price specified.
The disadvantage of a limit order is that if the limit price is not met by an interested buyer or seller in the time period specified, the order will not be filled. Second, and perhaps more importantly, timing is an essential factor in placing limit orders. Every order placed in an order book on an exchange is time-stamped. Trades that were placed first take precedence over orders that are accepted later, even if they have the same limit price as an order that was placed later.
Therefore, a stop-limit order involves two prices: the stop price - which will convert the order to a buy or sell order - and the limit price - the maximum price for which a trader is willing to buy or the minimum for which he is willing to sell.
Like millions of people, Michelle Milkowski bought Bitcoin and other digital currencies as the crypto industry spent millions of dollars on marketing. Kholood Eid for NPR hide caption 59ce067264