China giveth, and China taketh away — when it comes to cryptocurrencies at least.
Just last month, the entire cryptocurrency market surged, gaining $50 billion worth of market cap in 48 hours or so, on a pro-blockchain speech from Xi Jinping, the president of China.
Few had expected China’s leader for life to give such a powerful personal endorsement. The impact on the crypto space was electrifying, with Bitcoin leading the way.
Heading into the pre-Thanksgiving weekend, though, China-related news is having the opposite effect.
The entire crypto space is deep red as of this writing, with Bitcoin in the neighborhood of a 10% decline, on news that China is planning to take new action against cryptocurrency exchanges.
A good while ago, the People’s Bank of China (PBoC) had placed a ban on unauthorized crypto trading. But the ban was seen as soft, more word than deed and not heavily enforced.
After the Xi-related blockchain surge, it appears the PBoC got upset. They put out a statement saying they would take new steps to uphold the ban, and specifically tied their motivation to the speculative surge that followed Xi’s speech.
In the English translation of the statement, the PBoC said cryptocurrency exchange activity would be “disposed of immediately” once discovered. We’re not sure what that means, but it sounds ominous.
The news has put Bitcoin in full retreat mode, now testing support at the $7,000 level after climbing to $13,000 in June. This has led to a new round of worrying, with plenty of obsessing over short-term price movements.
There are some Bitcoin investors, however, who prefer to take the long view. They don’t sweat the short-term volatility so much, knowing that Bitcoin is going to move around a lot simply because of its newness as an asset. There are still plenty of “weak hands” in Bitcoin to sell on rumors or negative news releases, with strong hands ready to buy from them as the mini-panic subsides.
Recent news out of China, and the wild crypto swings created by it — way up in October, and back down again less than a month later — offers a timely reminder of something important. Bitcoin is subject to Einstein’s Theory of Relativity.
Meaning, the perception of Bitcoin varies widely depending on the mental location of the viewer. And just as with the physics-based Theory of Relativity, no single perception is “correct” or absolute.
We can see this by identifying two perspectives for Bitcoin — the trading perspective and the investing perspective. There are many more than just two, but these two in particular are wildly different.
The Bitcoin trading perspective, for example, is a rollercoaster ride of short-term price movements and market-moving news. It involves leverage and tape-reading and sometimes sweating bullets — a cocktail of elation and terror that is either glorious or awful, depending on what floats your boat.
The Bitcoin investment perspective, on the other hand, is much more detached and relaxed.
The investment perspective recognizes that Bitcoin has a very good chance — a compelling chance actually — of fulfilling the “digital gold” mandate and coming into its own as a globally recognized sovereign asset.
Given this basic odds and probability assessment, the inherent investment potential for Bitcoin is on the order of a 1,000% return, if not some greater multiple of that, e.g. a 2,000% or 3,000% return, over a period of years.
With the investment perspective, as juxtaposed against such astronomical return potential, the short-term squiggles become noise. Instead of sweating bullets, you just own some and let the story unfold..
There is nothing wrong with taking a trader’s perspective to Bitcoin — it can just be a stressful line of work.
Another way to think of the investment perspective, as compared to the trading perspective with an asset like Bitcoin, is to imagine a $1 stock with realistic potential to rise to $10, or possibly even to $20 or $30.
If one bought a stock like that at 90 cents, and a few days later it went to 70 cents, relative to the long-term return potential, what difference would it make?
Of course, one would also size the position so that fluctuations didn’t cause indigestion or undue turbulence in the portfolio. And the same thing makes sense for Bitcoin. This is also how asset allocators can buy into Bitcoin without drinking Pepto straight from the bottle.
If you put, say, two percentage points of your portfolio into BTC, and it moves around a lot and has the occasional freak-out, no problem. You are in it for the multi-year return thesis — and you only have 2% exposure, so a little bit of volatility is fine.
It is not just Bitcoin that is subject to the Theory of Relativity (where perception and perspective can vary widely depending on viewer location). The whole market is like this, and basically every investment is like this, because personal exposure levels can and do alter one’s perspective.
For instance: If an investor has a smallish position in a stock that has a bad earnings report, their relative perspective might simply be a shrug.
If there is another investor in that very same stock, but this time with a position so large they can’t sleep at night, their relative view of an earnings miss will be quite different (and quite possibly gut-wrenching).
So it is with Bitcoin. If you want to play video games with the thing, and if you want to pile leverage on top of such games, that is one way to do it.
But another way to do it — a wholly different relative perspective, and one that is just as valid though it may feel like a different world — is to think of Bitcoin as a logical long-term investment, and to size appropriately for sleeping at night with a time horizon of years.
As a bonus, this creates the non-trivial side benefit of not having to sweat PBoC press releases.
TradeSmith Research Team