Jeff Reeves's Strength in Numbers: Bitcoin recently topped $10,000 but don’t expect a run to record highs

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Bitcoin is back around $10,000. But don’t be fooled into thinking that means the cryptocurrency is destined to revisit previous highs twice this level.

I’m not saying this means a collapse. For better or worse, bitcoin BTCUSD, +1.08% is here to stay. But that doesn’t mean that investors should consider it a wise or safe investment now.

After all, the vast majority of bitcoin price movement is built on the sentiment of the moment. This is not necessarily a damning commentary in itself, as there are entire investing disciplines built around chasing sentiment in everything from microcaps to boring old index funds. But it’s important to take a hard look at immediate market trends before you buy in.

And right now, the short-term sentiment just isn’t pointing in the right direction for bitcoin.

Bitcoin’s momentum at risk

Admittedly, the currency was off to a red-hot start in 2020 as it logged its best January since 2013, thanks to a 30% monthly gain. What’s more, this comes amid a historical backdrop where bitcoin lost ground in the last five prior Januarys.

On the surface that looks encouraging. But as a Coindesk analyst pointed out recently, part of the force behind this rise is structural and related to a planned supply-cutting event in May 2020 where miners will receive half the cryptocurrency reward for “solving” the underlying bitcoin blockchain. Markets typically see a boost in the several months before the halving date but then a clear “market cycle top” near the event itself, he writes. It’s a structural pullback that old-school investors may call a “buy the rumor, sell the news” action.

Furthermore, before this breakout January in anticipation of the supply change, there was very little to be optimistic about in regard to bitcoin prices. In the second half of 2019, for instance, bitcoin declined in 15 out of 27 weeks with two more weeks ending flat. That’s only about a 38% weekly win rate.

The most damning evidence of all is that after briefly topping $10,000, bitcoin failed to hold on with a fast pullback of about 5% back below $9,800 on Monday, and volume appears to be weakening this week as dip buyers are reluctant to emerge and give the rally fuel to power higher.

It’s also worth remembering that many bitcoin traders had plenty of swagger in early 2019 as the digital currency briefly flirted with $12,000 as it traded at levels not seen since the late-2017 bubble. But they were burned quickly by a big pullback last fall, as the cryptocurrency crashed below $8,000, owing to cratering sentiment and an underperforming Bakkt exchange launch in October that failed to generate much-anticipated interest.

The bottom line in bitcoin has always been volatility. So perhaps rather than clutching to the idea of $10,000, investors should take a more objective look at January’s bottom of around $8,300 as a sign of where things could settle — or worse, prices as low as $6,500 set as recently as December.

A sentiment play, not a safe haven

Some breathless supporters will surely pile into the comment section to remind me that this kind of short-termism is missing the whole point. To them, bitcoin is a “safe haven” investment akin to gold — and in this environment of heightened uncertainty, now is the perfect time to pile in to this cryptocurrency as an alternative to risky stocks.

That’s a dangerous mischaracterization for two reasons: the first is that bitcoin is decidedly not gold, and the second is that even gold isn’t quite a stable as its proponents claim.

On the first point, let’s keep in mind that bitcoin went from under $1,000 to over $17,000 in less than a year’s time. Sure, it was to the upside, but it’s the very definition of a volatile move. Furthermore, we saw a lurch back down to a low of about $3,500 in early 2019 before a late-year rally took the cryptocurrency back to top $12,000 last summer.

In other words, this investment swung up 16,000%, crashed about 80%, then raced back up 240% … all in less than three years. I know some people have different definitions of “stable,” but it is objectively incorrect to use that word about bitcoin.

On the second point, it’s important to divorce the mythos of gold as a store of value from the reality of past performance. The hard numbers show that gold bullion is largely an “uncorrelated asset” that doesn’t move consistently based on the gyrations of the stock market. That admittedly has its appeal if you want to diversify, but it’s a far cry from a sure thing investment that is immune to tough times.

Consider the steady and substantial drop from around $1,800 an ounce in late 2012 to a low of around $1,100 by the end of 2015 as proof.

Bitcoin investors are right in some ways to compare the cryptocurrency to gold. Both assets can move independent of the stock market, and that means the potential for gains even when blue-chip stocks stumble in the short-term. But neither asset is a sure thing, and neither asset is a practical replacement for U.S. dollars or equity markets.

I’m not naïve enough to write one of the many premature obituaries for this digital asset, I have no beef with swing traders of bitcoin — or any other asset, for that matter. And I truly think blockchain technology has huge potential in the long run. But it’s important to tune out the black-helicopter crowd that thinks any investment is “the only safe bet,” be it gold, bitcoin or otherwise. That’s simply not a logical way to invest.

Jeff Reeves is a MarketWatch columnist.

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