Bitcoin Misconception #1: “Bitcoin is a Bubble”

Many people view Bitcoin as a bubble, which is under­stand­able. Especially for folks who were looking at the linear chart in 2018 or 2019, Bitcoin looked like it hit a silly peak in late 2017 after a parabolic rise that would never be touched again.

This linear price chart goes from the begin­ning of 2016 to the begin­ning of 2019, and shows how it looked like a classic bubble:

Maybe it is a bubble. We’ll see. However, it looks a lot more rational when you look at the long-term logarithmic chart, especially as it relates to Bitcoin’s 4‑year halving cycle.

Each dot in that chart repre­sents the monthly bitcoin price, with the color based on how many months it has been since the prior halving. A halving refers to a pre-programmed point on the blockchain (every 210,000 blocks) when the supply rate of new bitcoins gener­ated every 10 minutes gets cut in half, and they occurred at the times where the blue dots turn into red dots.

The first cycle (the launch cycle) had a massive gain in percent terms from zero to over $20 per bitcoin at its peak. The second cycle, from the peak price in cycle 1 to the peak price in cycle 2, had an increase of over 50x, where Bitcoin first reached over $1,000. The third cycle from peak-to-peak had an increase of about 20x, where Bitcoin briefly touched about $20,000.

Since May 2020, we’ve been in the fourth cycle, and we’ll see what happens over the next year. This is histor­i­cally a very bullish phase for Bitcoin, as demand remains strong but new supply is very limited, with a big chunk of the existing supply held in strong hands.

The monthly chart is looking solid, with positive MACD, and a higher current price than any monthly close in history. Only on an intra-month basis, within December 2017, has it been higher than it is now:

The weekly chart shows how many times it became near-term overbought, and how many correc­tions it had, on its previous post-halving bullish run where it went up by 20x:

My job here is simply to find assets that are likely to do well over a lengthy period of time. For many of the questions/misconceptions discussed in this article, there are digital asset special­ists that can answer them with more detail than I can. A downside of special­ists, however, is that many of them (not all) tend to be perma-bulls on their chosen asset class.

This is true with many specialist gold investors, specialist stock investors, specialist Bitcoin investors, and so forth. How many gold newslet­ters suggested that you might want to take profits in gold around its multi-year peak in 2011? How many Bitcoin person­al­i­ties suggested that Bitcoin was probably overbought in late 2017 and due for a multi-year correction?

I’ve had the pleasure of having conver­sa­tions with some of the most knowl­edge­able Bitcoin special­ists in the world; the ones that keep their outlooks measured and fact-based, with risks clearly indicated, rather than being constant promoters of their industry at any cost. Bitcoin’s power comes in part from how enthu­si­astic its supporters are, but there is room for indepen­dent analysis on bullish poten­tial and risk analysis as well.

And as someone who isn’t in the digital asset industry myself, but who has a background that blends engineering and finance that lends itself reason­ably well to analyzing it, I approach Bitcoin like I approach any other asset class; with an acknowl­edge­ment of risks, rewards, bullish cycles, and bearish cycles. I continue to be bullish here.

If this fourth cycle plays out anywhere remotely close to the past three cycles since incep­tion (which isn’t guaran­teed), Bitcoin’s relative strength index could become quite extreme again in 2021. Here’s a chart from PlanB about Bitcoin’s histor­ical monthly RSI during the bullish and bearish phases of its 4‑year halving cycle:

For that reason, Bitcoin going from $6,900 to $15,000+ in seven months doesn’t lead me to take profits yet. In other words, a monthly RSI of 70 doesn’t cut it as “overbought” in Bitcoin terms, partic­u­larly this early after a halving event. I’ll likely look into some rebal­ancing later in 2021, though.

Each investor has their own risk toler­ance, convic­tion, knowl­edge, and finan­cial goals. A key way to manage Bitcoin’s volatility is to manage your position size, rather than try to trade it too frequently. If Bitcoin’s price volatility keeps you up at night, your position is probably too big. If you have an appro­pri­ately-sized position, it’s the type of asset to let run for a while, rather than to take profits as soon as it’s slightly popular and doing well.

When it’s at *extreme* senti­ment, and/or its position has grown to a dispro­por­tion­ately large portion of your portfolio, it’s likely time to consider rebalancing.