When the Big Squeeze Comes to Bitcoin
November is shaping up as a big month. We have the ASX 200 index on track to take out 6000 points.
We have the bitcoin hard fork due next week.
And we might even see Amazon launch here in Australia as well.
That last point is now even spicier than it already was.
Australia’s competition ‘watchdog’, the ACCC, is giving Amazon the green light to use aggressive discounting to make sales.
Aussie retailers were hoping for a reprieve on this front. But it’s not illegal to lower your price, no matter who you are.
Unfortunately, as far as Amazon’s competition is concerned, they know it’s quite happy to give away margin early on to become the top dog in town.
Amazon’s arrival is not news. It’s long been priced into the market.
The thing to do now is to keep an eye on retailers that are rising despite Amazon kicking off here.
That doesn’t mean such a stock is an automatic buy, but it might mean checking it out a bit further.
Because, in a slightly weird way, the scene could be set for some earnings surprises to the upside.
That’s because the negativity around Amazon taking out everyone else has probably gone too far.
Kogan is a stock that’s taken off lately, despite looking vulnerable at first glance.
But Amazon is interesting to watch for another reason.
That’s for the day it announces it’s accepting bitcoin as a form of payment.
Or will it?
100,000 users added in ONE day
News came last week that Amazon has registered several domain names around crypto and the blockchain.
It might even be building its own cryptocurrency. Only time can tell here.
But it doesn’t take much imagination to see the bitcoin price getting a boost the day Amazon says it will accept it for payment.
Bitcoin is well over US$7,000 now.
The price has run up lately, in part because of a major US exchange saying it will launch bitcoin futures trading by the end of this year.
This both legitimises bitcoin as an asset class, and can draw in more money to the market in general.
One of the biggest crypto exchanges, Coinbase, added 100,000 users the day after this announcement came.
I don’t think there’s much doubt anymore that bitcoin and crypto assets are here to stay.
But what is the right price?
You can’t value bitcoin like shares and bonds, which is generally done by discounting their future cash flows.
Bitcoin doesn’t produce an income stream.
You also need to get an idea of what bitcoin is being used for.
And, at the moment anyway, it’s fair to say it’s not as a ‘currency’, despite the perception.
When people buy bitcoin, they tend to hold it, not use it. Most likely they’re hoarding it for future gains.
This brings something called ‘velocity’ into play.
You might have heard about this concept already. It’s basically how fast money is changing hands.
It’s not unique to crypto.
In a hot economy, money turns over faster as people spend. In a recession, people conserve their spending power, so velocity turns down.
This can play out on the value of bitcoin, or any crypto, according to Chris Burniske.
He’s the coauthor of a new book called Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond.
You’ll have to read the book to get the worked examples. But here’s the general idea: The less bitcoin turns over, the higher the price it will command in the market.
And if we assume new entrants are coming into the crypto market because of the price gains being publicised, then it’s likely the majority of them will become long-term holders too.
So there’s potential for the available supply of bitcoin to get smaller as the market for it gets bigger.
That gives the price a bullish bias.
Bitcoin’s original code is already deflationary. There’s only so many total coins that will ever become available.
So there’s a double whammy shaping up there.
There’s also something else about bitcoin that you don’t realise until you become an active follower.
Bitcoin proponents don’t just invest their money here.
They often become true believers in bitcoin’s initial vision of putting the monetary power back into the hands of the people, and not the corrupt banking system that we have now.
This is why the hard fork due on 16 November has become a massive issue. It’s not just a debate about how to scale bitcoin.
It’s a bigger question of what bitcoin is, and who has the right to change it, and who should have the most power within the community.
Bitcoin’s detractors like to make out it’s a bubble, which is likely to see a dramatic price drop.
Anything’s possible, of course. But there are trends in place to suggest that, at some point, bitcoin could see a massive liquidity squeeze, and the price could actually spike even harder than it’s running now.
The time to be learning about this market is now. Go here to get started.
Editor, The Daily Reckoning Australia