Here's Why You Shouldn't Be Betting On Bitcoin

A couple of days back, I received a forwarded Whatsapp message from a friend. Containing the image of a dollar bill within a bubble, it optimistically read: "Bitcoin isn't the bubble… it's the pin". The implied prediction being that enough people would exchange their dollars for the beleaguered cryptocurrency, that the selling frenzy would cause the former to crash! While I like to keep an open mind about potential price movements in any financial instrument, I personally found the suggestion to be preposterous. Would a large portion of the $ 3.6 trillion M1 float really be moving into Bitcoin in the future? That's hard to wrap my head around.

I've personally spent the past few moths delving into Bitcoin, its origins, its brief history, and the main technology behind it (Blockchain), and have reached the conclusion that nothing warranted its speculative price rise last year, and it's extremely unlikely (to put it mildly) that we'll see those highs ever again.

Why, you ask? Well, for a moment - forget all the mystique surrounding Bitcoin (a mysterious founder, a complex sounding underlying technology…) and try to simplify things to understand Bitcoin for what it really is - that is, a means of exchange, or a "currency" (unlike many Bitcoin proponents, I don't see it as a Financial Asset because it's not a store of value).

Now, here's the thing - while trading volumes of Bitcoin have definitely been buoyant, that itself cannot be held as a predictor of "good things to come". As history has taught us harshly - speculative buying and selling, not backed by solid fundamentals, is the recipe for a guaranteed crash in prices in any financial instrument.

Contrary to what you might believe, Bitcoin is losing popularity as a currency. Expedia, which until recently used to accept Bitcoin checkouts, has terminated the service. Microsoft is no longer accepting Bitcoin payments, per recent reports. Amazon has been dilly-dallying on its decision on Bitcoin checkouts for a long time now, but asides of booking a few domains that combine their brand name with crypto names, has not moved forward. I suspect that many more instances of retailers quietly pulling the plug on Bitcoin checkouts are in store. The simple reasons being: volatility, an inefficient and slow settlement process, and all the bad press. I suspect that with the questions surrounding Bitcoin of late, a lot of retailers would be unwilling to risk the collateral damage that could ensue from offering Bitcoin checkouts. Now, if the trend isn't bucked soon and Bitcoin continues to lose its popularity as a means of exchange, the question that arises is - why would anybody (eventually) want to own a currency that they cannot buy stuff with?

As a concluding argument, look at the weekly price chart of Bitcoin below. Post its Jan '18 breakdown, it has consistently been making lower highs and lower lows (the good old Dow Theory at work!). 11,500-odd in March, 9,700-odd in May and now - it's going to face a tough test at the 20-week moving average mark where its trading today. The next wave of correction may just be around the corner.

Others may see it differently, arguing that Bitcoin has risen more than 30% in a month from its June '18 lows. Conversely, I argue that this is really just a retracement period within an overall correction where it fell nearly $4,000 in the previous bearish wave that ensued in April/May (read my article where I had predicted the correction here

There's an old adage in the Financial Markets which says "don't try to catch a falling knife". Keep that in mind the next time you have the urge to dabble in Bitcoin!