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BITCOIN: An investment worth millions?

I clearly remember the moment when I was advised to buy Bitcoins back in September 2010. At that time almost no one knew about the digital currency. As a part of the herd, I was also skeptical and refused even to consider the idea. Pity. The price was just $0.06. Three years later at the top of the mania it reached almost $1,200. A hypothetical investment of $100 would yield a return of $2,000,000 for a period slightly longer than 3 years. Clearly, I haven’t heard of an investment which has offered such a return. A bubble or not, the Bitcoin was a great opportunity, if bought at $0.06.

This example comes to show some important conclusions about investing in general. First, at the end of a bull market there is always a mania. Bitcoin was very popular at the top, it finally began receiving a lot of media attention. People wanted to purchase it after it made hundreds of percentages in return, not prior to that. Second, after the peak in December 2013, the Bitcoin has dropped considerably to a level of just $160. A decline of more than 85%. It doesn’t receive any media attention as a plausible investment opportunity any more. On the contrary, we hear how authorities around the world close Bitcoin exchanges and other types of negative news. Pessimism always prevails at market bottoms. Third, a savvy investor must never take into consideration “the fundamentals”. Nothing has changed in Bitcoin in the last several years to “fundamentally” justify such price swings. The only thing that has changed was mood. People were pessimistic at the beginning, then the extreme optimism and greed occurred and currently a new wave of pessimism prevails once again. The price perfectly reflects such mood changes. Actually, the price is a pure reflection of the mood among investors and speculators.

Is an investment worth buying after a 85% decline from the top? The answer is: MAYBE. We should be careful even if the instrument looks cheap at a first glance. The problem is that it may become even cheaper. If one buys now and the decline reaches 90% from the top, a 33% loss on investment will be realized. Moreover, if a bottom is finally reached, no one guarantees that a sudden and significant price increase will take place. Example: after the South Sea Bubble burst the UK stock market moved nowhere for several decades decades after the bottom was reached. Burying capital in non-productive investments is painful. It is less painful to realize a quick loss and exit the market instead of waiting endlessly for an investment to start moving in the desired direction. In order to call a bottom, a complete 3-wave decline from the top should have occurred. Also, the sentiment should be quite negative. The second condition is already satisfied as already discussed.

Bitcoin

After a five-wave impulsive increase, the price finally peaked in late 2013. A three-wave A-B-C decline to the range of the previous wave 4 from the increase is needed as a price target for the expected bottom. The previous wave 4 brought the price within the range between $50 and $220. Officially, the target range is already reached and an increase should be expected. Nevertheless, wave C seems to be incomplete. It subdivides only into four sub-waves. A final plunge is needed to complete wave C, so that we can  call a final bottom and end of the bear market. Furthermore, the current upward movement looks corrective. It does not develop in a five-wave structure in order to be considered as an impulsive move in the upward direction and a new bull market. Instead, it looks like a consolidation, a typical move for a wave 4.

The analysis indicates that we are close to a final bottom in the price of Bitcoin. Of course, the price level of $0.06 will never be reached again. However, the approaching buying opportunity in Bitcoin happens very rarely. After the final plunge takes place (wave 5 of C), it will finally bring the price to the $50-$100 level. The expected multi-year bull market afterwards must considerably exceed the previous peak from $1,200. My personal projection is for the  price level between $5,000-$10,000. Optimism will inevitably return as Bitcoin receives  a wide-spread popularity during the powerful bull market of wave 3 ahead. Not to mention about the Bitcoin’s potential to substitute the fiat currencies as a legitimate store of value.