Bitcoin (BTC-USD), as well as the blockchain enterprise sector in general, has become increasingly correlated with stocks in recent months. Due to the upcoming election, the lack of progress on the fiscal stimulus front, uncertainty about the state of the economy going forward, the likelihood of an increase in volatility, as well as other factors, things could get messy in the blockchain enterprise segment in the weeks ahead.
Bitcoin: 1-Hour Chart
We see that BTC is forming what appears to be another head and shoulders pattern, similar to the prior ones in the chart above. Furthermore, Bitcoin got rejected at the critical $11,800 resistance level recently and broke through support at $11,500. More recently BTC has been testing the $11,250 area of support and is dangerously close to breaking below this crucial level. If $11,250 gets penetrated, Bitcoin could melt down further below $11,000 and possibly retest $10,500, as well as $10,000 support levels next.
A Longer-Term Outlook
Despite the possibility for short-term downside, we remain quite bullish on BTC and the overall digital asset segment long term. As the above chart illustrates, BTC moves in waves, and the top of each wave is substantially higher than the previous top.
I see no reason for this trend to end, and the next major top will likely be substantially higher than the previous one around $20,000. In fact, I believe the next major top could be around $75,000, but it will likely take some time (1-3 years) to get there.
Bitcoin’s Correlation With Stocks
Since the mid-March bottom, Bitcoin has roughly tripled, while the S&P 500/SPX (SP500) has appreciated by about 58%. Despite the clear outperformance, we see that Bitcoin has been moving largely in tandem with the stock market. This was also apparent during the February/March meltdown as stocks and Bitcoin essentially meted down simultaneously.
So, here we are now. The presidential election is approaching, certain economic indicators as well as some key company earnings are coming in worse than expected, fiscal stimulus seems to be off the table until after the election, volatility appears to be picking up, and Bitcoin coupled with stocks could experience another notable leg lower.
Long Term, Still Bullish
Despite the apparent correlation with stocks, we remain very bullish on Bitcoin and select blockchain enterprises in the intermediate and long term. One reason for this is because Bitcoin and systemically important digital assets are likely to play an increasingly important role in the future economy, as some offer valuable services and others serve as digital currencies/payment systems.
Furthermore, Bitcoin and other key “coins” are essentially inflation proof, as there is only a certain amount that can ever exist in circulation (Bitcoin 21 million). A stark difference to the dollar and fiat currencies in general that are being debased on a perpetual basis and can be printed endlessly if so desired by central banks.
Key Blockchain Enterprises to Consider
Bitcoin is the gold standard of the digital asset market, and it serves as a payment system as well as a unique store of value mechanism.
Litecoin (LTC-USD): If Bitcoin is akin to digital gold, then Litecoin is somewhat akin to digital silver. It may not be the store of value that Bitcoin is in the digital world, but it is a far more efficient transactional vehicle.
Bitcoin Cash (BCH-USD): Bitcoin Cash is another transactional coin, much like Litecoin that can handle scale, speed, and cost far more efficiently than Bitcoin.
Zcash (ZEC-USD): Zcash is another top and very promising transactional coin, but is more encrypted, thus making transactions more difficult to track.
Dash (DASH-USD): Another top transactional coin, similar to Zcash.
Monero (XMR-USD): This is the only top transactional coin that I am aware of that is essentially untraceable.
Please understand me correctly. I am not talking about nefarious transactions, money laundering, etc. here. I am simply pointing out that there are coins that can be used with a certain degree of anonymity, and in my view, there is nothing wrong with that. The government does not need to know when, where, and how I spend my own hard-earned money. This is my personal libertarian viewpoint, and everyone is welcome to their own.
Functional Blockchain Enterprises
Not all digital assets/blockchain enterprises are created equal. In fact, the ones that I am discussing are all different and have their own unique role to play in the future economy. Transactional coins are designed to work as currencies/payment systems, while functional coins are designed to perform a particular function/offer a service.
For instance: Ripple (XRP-USD) enables banks to perform interbank and other transactions far more efficiently and less costly than traditional methods.
Ethereum (ETH-USD) handles smart contracts and various applications.
Cosmos (ATOM-USD) specializes in connecting blockchains together.
Other functional coins we see substantial potential going forward include: Tron (TRX-USD), Tezos (XTZ-USD), Swipe (SXP-USD), EOS (EOS-USD), Cardano (ADA-USD), and several others.
How to get exposure without going through crypto exchanges
I understand that not everyone is comfortable with cryptocurrency exchanges, blockchain wallets, etc. Unfortunately, the market is rather thin on alternative options (although Bitcoin futures are available).
This Is Where the Grayscale Trust Comes In
For now, market participants can get exposure to several “coins” through the Grayscale Trust.
So what does the Grayscale Trust offer?
Well, market participants can get exposure to Bitcoin through Grayscale’s OTC (GBTC) trading vehicle. Likewise Grayscale offers similar trading instruments for Ethereum (OTCQX:ETHE), Bitcoin Cash (OTCQX:BCHG), Ethereum Classic (OTCQX:ETHE), Litecoin (OTCPK:LTCN), and a diversified large cap-fund (OTCQX:GDLC). Other crypto trading instruments appear to be on their way as well from Grayscale.
The Bottom Line
Volatility in stocks appears to reflect poorly on Bitcoin and the digital asset market in general. As there is likely to be more volatility ahead in stocks as well as other key markets, Bitcoin/blockchain enterprises could decline in the short term. Nevertheless, intermediate and long term, we remain extremely bullish on this segment and see a lot of upside potential ahead in the next 1-5 years and beyond.
However, in this uncertain environment, our portfolio’s 25% allocation in Bitcoin and other digital assets feels a bit heavy. Therefore, we began locking in profits in some blockchain enterprises after the $11,500 level was unable to hold up. Intuition tells me that $11,250 may fail in upcoming sessions as well, and a mini meltdown to around $10,500-$10,000 is plausible. Therefore, we are reducing our digital asset holdings to raise our cash position, but we will reenter the market once volatility calms down after the election and we have a clearer view on where markets are headed next.
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Disclosure: I am/we are long ASSETS MENTIONED. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Please always conduct your own research before making any investment decisions.