While Bitcoin remains highly speculative – I think it can continue to strengthen from here. Bitcoin is so volatile that I want to reiterate my belief that it only belongs in your portfolio as part of your highly speculative allocation (link). I also think it is worth reviewing my 3 Rules of Bitcoin (link).
The bullish case is that Bitcoin survived the recent bearish case so well.
Back on September 15, it appeared to me as though not only China, but a number of public figures were trying to crack down on Bitcoin (link). It was successful at first, as Bitcoin continued its decline, dropping from over $5,000 to as low as $3,000. Bitcoin has rebounded sharply since then.
The ‘evangelists’ of bitcoin argue that the fact it isn't controlled by governments is precisely why you should own it. Bitcoin is meant to be function outside of the realm of central banks and governments. Bitcoin seems to have navigated this recent crackdown with great success.
By passing the recent test with flying colors, Bitcoin should attract some new investors. There are many investors who have watched the rally in cryptocurrencies from the sidelines because they have concerns about the ability of cryptocurrencies to deliver as advertised. It seems likely that some of these investors will dip their toe in the water now - creating new demand for cryptocurrencies in the near term. This additional new demand should help keep prices rising. If there were easier ways for "mainstream" investors to get involved in Bitcoin (like ETFs) the rally would be even stronger.
The cynic in me, needs to point out that many people have strong incentives to prop up the price of Bitcoin. Bitcoin miners, in particular, come to mind. Bitcoin mining remains very profitable at these prices. In a world where there are no rules (Rule #2 of my 3 Rules of Bitcoin) we have to consider that some of this rebound may be driven by those who have the most to gain. That incentive and risk of manipulation is always an issue in thinly traded markets, but I think it is an even greater concern in the sometimes murky world of cryptocurrencies.
While I still don't have a strong conviction on the long term viability of cryptocurrencies, I do think it is impressive that they recovered from this China crackdown, which is positive for prices in the near term.
For disclosure, I don’t own Bitcoin at the time of writing this, but will likely be adding some back in the near future.
