Bitcoin Is Sinking. Is Now the Right Time to Buy?
Warren Buffett calls it a 'gambling token,' and the cryptocurrency is not a stock. But there's a way to assess its value and find out when to pocket some coin.
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The market is acting well on Wednesday morning as investors anticipate a favorable reaction to Nvidia's (NVDA) report after the close. Breadth is running about 55% positive, and the Magnificent Seven (MAGS) are leading the way with a 1.9% gain.
I'm looking for some beaten-down names that may be ripe for a bounce, and I have been studying Bitcoin. After hitting an all-time high on Oct. 3, Bitcoin (I'll use the ETF (IBIT) as a proxy) is down about 26%, which is typically considered a bear market.
Cryptocurrencies in general and Bitcoin in particular ripped higher primarily due to friendly treatment from the Trump administration, but the recent selling has been very intense, and there isn't any immediate support on the chart.
If you are contemplating a position in Bitcoin, the most important thing to understand is that it can't be valued like a stock. There is no business, assets, or cash flow. In 2022, Warren Buffett said, "If you told me you owned all the Bitcoin in the world and you offered it to me for $25, I wouldn't take it, because what would I do with it?" And he has repeatedly said that Bitcoin "doesn't produce anything."
For an investor like Buffett, Bitcoin doesn't make sense, but the reality is that it has gained growing acceptance in the investment community and has spawned an enormous cryptocurrency industry. Buffett buys businesses that can be valued, so it is no surprise that he has called Bitcoin "gambling tokens."
I don't have any problem trading "gambling tokens" as long as it is clearly understood that that is what Bitcoin is. I don't pretend to understand how Bitcoin or cryptocurrencies work, but I do know that Bitcoin's price is determined by supply and demand. Since there is no business or cash flow, there is no way to value it other than by pure supply-and-demand. Bitcoin is never fundamentally cheap or expensive. It is always valued fairly because the fair price is purely a function of what buyers are willing to pay and what sellers are willing to accept.
To put it simply, the only way to trade Bitcoin logically is to use the charts. Forget all the arguments about it being a store of value or a reserve asset. That may be the case, but buying it on that basis is akin to betting on the outcome of a sporting event. You may get a payoff, but luck will play a big role.
If you want to approach an investment in Bitcoin on a logical basis, the only thing you can consider is supply and demand, and that is fully reflected in the chart.
Let's take a look at the chart.
As you can see, the chart is currently quite ugly. There is no immediate support, and several downside gaps remain unfilled. Major support is another 10% lower than the current price.
Is this a chart to buy right now? No technician would say this is a good spot to buy. There may be some contrarians who say the chart is so bad that it's good, but that is a tough argument to make.
I'm holding a longer-term position in IBIT as well as in some Ethereum-related plays, but I have no interest in adding to them at this time. I want to see some support from, and I don't see any right now.
Bitcoin is an asset class that will continue to expand, but like every market, it will go through bull and bear cycles. The cycles will be even more intense for Bitcoin, because of the lack of traditional valuation metrics.
It isn't the time to buy Bitcoin, but eventually it will be. We have to sit and watch the chart to tell us when to hit the buy button.
At the time of publication, DePorre was long IBIT.
