Yet I acknowledge the intrigue of Bitcoin is. Instantaneously, investors around the globe have been mesmerized by digital gold rushes. Many analysts out there are confidently calling a 75% probability of hitting new all-time highs! The technology behind decentralized finance and the possibilities it has are extremely exciting. I confess, I’m always skeptical of bullish predictions because the cryptocurrency market is just that–a market that’s very hard to predict.
As such, OverTraders.com is determined to bring a more even-handed approach to the financial markets. That requires cutting through the hype and studying the data with a skeptical, discerning eye. Sure, Bitcoin has proven itself to be an incredibly effective long-term investment. Yet, this upward trajectory has been marked by bouts of extraordinary volatility and deep drawdowns. To dismiss this volatility is to dismiss a core facet of Bitcoin’s nature.
Think about the volatility spikes we have seen. In April 2024, volatility spiked to over 80, close to twice what Bitcoin was showing itself. At the beginning of 2024, Bitcoin had a price of about $60,000. Shockingly, at that time its volatility was almost half of what it would go on to see in 2021. These up and down undulations are illustrative of the sharp turns that US housing markets have experienced—sometimes seemingly without obvious, foreseen catalysts. A regime shift in volatility was taking place back in June 2023 and saw a change in the tide with lower realized volatility. The realized volatility of Bitcoin is very low on any given day if it is below the fifth percentile. On the flip side, if it is above that threshold, then it’s high.
Predicting future price movements in such a volatile environment is a fool’s errand. While various analytical tools are employed – historical price analysis, technical indicators like Moving Averages and RSI, on-chain data analysis, machine learning models, and even sentiment analysis – none offer a foolproof crystal ball. These approaches provide critical guidance. They are based on historical performance and present sentiment, which might not be great predictors of future market actions.
I have a firsthand appreciation of just how rapidly the mood of the market can change. Just one tweet from a decentralized face of the competition can send the crypto market into a tailspin. Likewise, one regulatory announcement or an unexpected economic occurrence can erase those gains within a few hours. This extreme sensitivity makes long-term predictions, particularly those claiming very high levels of certainty, fundamentally fraught.
In addition to these issues, it is important to view the investment within the wider landscape. The potential for high returns with Bitcoin comes with extreme risk. Stocks and bonds—which are much less risky—offer a much clearer and steadier road to wealth accumulation. Effective risk management requires a diversified portfolio, and RiskRewardTrading at OverTraders.com believe that diversification is the number one key to risk management. For most investors – particularly those with long-term time horizons – a significant allocation to cryptocurrency is likely inappropriate.
Investors can continue to earn strong returns without ever stepping foot into the space of cryptocurrency. Even investment titans like Warren Buffett take a hard line against Bitcoin. In doing so, they highlight the very real risks and uncertainties associated with digital currencies. Bitcoin is different from other investments since it has no underlying assets or sovereign protections. Its worth is based primarily on hype and investor mood.
The timeframe for that investment is perhaps the most important factor of all. Experts often advise that investors in risky assets like stocks should have a horizon of at least three years to weather potential volatility. We all know that Bitcoin’s price can fluctuate drastically even over the course of a few hours. This volatility is a key barrier to entry for time-constrained investors or those with a low-risk capacity.
Making this situation even more complicated is the regulatory climate around Bitcoin. Its unique combination of traits have won it the nickname “legal platypus”. This unique status complicates issues of classification and regulation. To date, jurisdictions across the country have taken very different approaches to developing regulations. This results in a convoluted patchwork that only confuses and frustrates businesses and investors. The regulatory scrutiny certainly hasn’t helped, which may result in stricter regulations limiting their short-term potential growth.
In many jurisdictions even fledgling crypto startups are slapped with heavy requirements, like New York’s BitLicense that requires burdensome disclosures. The overall tax treatment of Bitcoin is equally murky, with the IRS, SEC, and CFTC treating it as property or a commodity, respectively. This lack of clarity creates uncertainty and thus adds to the overall risk of investing in Bitcoin.
The possibilities of what Bitcoin can do to improve and democratize finance are pretty incredible. We need to be thoughtful and pragmatic about how we engage the market. Together, high volatility and regulatory uncertainties make it the most speculative of assets. It’s not a one-way ticket to fortune. It’s entirely based on the whims of the market.
Who wouldn’t want a 75% chance of setting new all-time-highs? That said, I would advise all investors to proceed with caution and due diligence before devoting a significant portion of their portfolio to Bitcoin. The crypto market is never short on surprises. We know enough about the world—enough to protect your capital—to be very skeptical of it. At OverTraders.com, we believe in empowering investors with knowledge and critical thinking skills, enabling them to make informed decisions based on facts, not just hype.
