For bitcoin, it may all be about market timing.
The cryptocurrency’s wild price swings are fertile territory for momentum trading. But investors face a problem with bitcoin: it's difficult to predict its price movement. Thomas Lee of Fundstrat Global Advisors suggests a possible solution: holding onto bitcoin. Or, if you prefer crypto lingo: Hold On For Your Dear Life (HODL) onto bitcoin. (See also: Should You HODL Bitcoin?)
Lee makes his case through data comparison.
“Market timing is generally discouraged in traditional equity investing. If an investor missed out on the 10 best days (for S&P 500) each year, the annualized return drops to 5.4 percent (ex-10 best), from 9.2 percent. In other words, the case for buy and hold in equities is the opportunity cost of missing out on the 10 best days,” he wrote in a recent note.
Lee compared gains for bitcoin in 10 days versus the entire year and found that annual returns for bitcoin fell by 25 percent if its gains from 10 best-performing days each year were not included in the calculation. To make matters worse, bitcoin’s returns turn negative if those gains are not included.
In his note, Lee also said bitcoin’s regulation problems will subside in the latter half of this year. The legal status of bitcoin and other cryptocurrencies is still unclear in most countries. This has led to the mushrooming of a crypto ecosystem that mostly functions on the fringes of an existing financial ecosystem. While cryptocurrencies have made substantial gains in mainstream consciousness this past year, bitcoin itself has become synonymous with everything that is wrong with them. In turn, it has drawn the ire of regulators and government officials who have declared it “a failure”.
But Lee writes that bitcoin’s regulation problems will subside in the latter half of this year with “the clarification of regulatory hurdles.” He has predicted a price target of $20,000 by the middle of June for bitcoin and $25,000 by the end of this year.
Better Times for Bitcoin Ahead?
Lee’s note adds to the chorus of other bitcoin believers, who advise holding the cryptocurrency. Part of the problem is that predicting price gains for bitcoin is an elusive task. Technical analysis has had very limited success as have regulatory hurdles and media mentions. This is unlike equities where price movements can be reasonably attributed to fundamental or technical analysis. Lee’s note also has attractive price targets for investors who are long-term believers in cryptocurrencies, signifying profits for those who stay in the game.
The note could also be construed as an indicator of cheerier times ahead for cryptocurrency markets. Bitcoin’s price shed almost 65% from its December highs last week. But it has rallied since. The original cryptocurrency has mostly acted as a bellwether for price movements of smaller coins. This means that overall valuations for crypto markets are set to rise in the coming months, if Lee’s note is to be believed.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.01 bitcoin.