As Bitcoin prices slide below $ 40,000, should you buy down or sell?
As Bitcoin prices (CCC: BTC-USD) collapsed this week, crypto investors are looking a lot like a deer in the headlights. ETF flows for most of the six popular blockchain ETFs have remained largely stagnant even as crypto prices have fallen. Source: Shutterstock Indecision highlights a disturbing truth: Bitcoin investors are moving from an aggressive crowd looking for profit to an increasingly fearful crowd to miss out. In March, the Grayscale Bitcoin Trust (OTCMKTS: GBTC) – an indicator of institutional investor interest – saw its NAV premium go from positive to negative. In their place, conservative investors intervened. On Wednesday, Wells Fargo (NYSE: WFC) joined other wealth management teams to announce plans to open crypto trading to high net worth clients. (Apparently, it’s better to let your customers lose money than to lose it yourself). Meanwhile, forward-looking investors have switched to more technologically advanced cryptocurrencies like Ethereum (CCC: ETH-USD), Cardano (CCC: ADA-USD) and Internet Computer (CCC: ICP- USD). Central banks have also announced plans to launch their own digital currencies.InvestorPlace – Stock Market News, Stock Advice & Trading Tips This makes a rally in BTC even more unlikely. As the age of Bitcoin begins to show it, its future has never been so shaky. Bitcoin Price: Error of the 30% drop in Bitcoin’s $ 60,000 price target this week highlighted a fact experienced investors have long known: Bitcoin has no fundamental value. The price targets of $ 60,000, $ 600,000 or $ 6 million seem hollow because the cryptocurrency is only worth what your neighbor is willing to pay. (Fortunately, those who live next to a Goldman Sachs office). The 7 Best Ways to Invest in Semiconductors Now The lack of a serious price target has long benefited Bitcoin holders. Influential investors like Cathie Wood of ARK Innovation have long proclaimed price targets of $ 500,000 without providing any deep rationale. Squint strong enough, and any value seems possible. The benefits, however, go both ways. Since 2020, Bitcoin prices have become more of a leveraged bet on investor confidence than cryptocurrency adoption. According to data from Thompson Reuters, the cryptocurrency now has a 25% correlation with the S&P 500 and a 34% correlation with Tesla (NASDAQ: TSLA). The 4% swing in the stock market last week caused crypto prices to drop by a third. Usually, investors may want to buy the plunge. The stronger-than-expected post-Covid recovery has led banks to revise their inventory projections upwards. Bitcoin would probably win too. But this time could be different. As experienced crypto investors have long known, the Bitcoin community is surprisingly status quo. As other competitors continue to rise, Bitcoin will find itself further and further behind. The Bitcoin Protocol: Cryptocurrencies led by Miner League stakeholders like Ethereum have advanced. In November, the world’s No.2 crypto joined Cardano and other ‘third generation’ coins to launch an energy-efficient proof of stake protocol. Rather than letting miners waste energy on computations of unnecessary complexity, PoS systems run on a system of approved validators. Energy savings can be as high as 99.7% or more, and crypto watchers expect Ethereum to completely switch its blockchain to PoS by the end of the year. These improvements are possible because cryptocurrencies like Ethereum rely on a stakeholder-based voting system rather than a mining-based system. With sufficient support from the Ethereum Foundation and the community, beneficial proposals can proceed without the support of miners. Centralized cryptocurrencies have found it even easier to push for change. Ripple controls 60% of all XRP, making changes virtually effortless. Bitcoin, on the other hand, remains relatively heavy due to a historical quirk in its development: BTC miners hold an outsized vote on protocol changes. Although miners only make up 10% of the supply, the Bitcoin protocol does not work on a democratic voting system. Instead, all proposed changes follow a similar process – miners must reach consensus for any proposal to pass. While the system can prevent fraud and security issues, it also makes cryptocurrency difficult to change. The Bitcoin community put this theory to the test in 2017 when they launched an offer to increase the cryptocurrency’s block size limit. It was not until 95% of the miners accepted the change that the software upgrade was successful. This makes it virtually impossible to switch to an energy efficient PoS system without a rigid fork. No miner will willingly vote for a more power efficient system as it renders their billion dollar investments in ASIC machines worthless overnight. It’s a prisoner’s dilemma where stakeholders acting in their own best interests poison the cryptocurrency for themselves and for everyone else. Already former Bitcoin champions like Tesla CEO Elon Musk have refused to support energy-burning cryptocurrency. Other negative reactions could be underway. Rearranging the lounge chairs on the USS Bitcoin hasn’t stopped Bitcoin fans from losing hope. In April, Niklas Nikolajsen, the founder of Swiss crypto broker Bitcoin Suisse, predicted that Bitcoin would eventually switch to energy efficient PoS. “I’m sure that once the technology is proven, Bitcoin will adapt to it as well,” the entrepreneur noted in a German TV interview. In truth, Bitcoin’s technology has fallen so behind that it might not matter. Today, cryptocurrency can still only act as a medium of exchange, not as a payment processor or commercial bank. These are the banknotes of the cryptocurrency ecosystem rather than the pipes or pumps. Over time, this weakness could become the death knell for the price of Bitcoin. In its current state, crypto’s limited functionality makes it vulnerable to competition from central bank-sponsored digital currencies. China’s e-Yuan project has already threatened Bitcoin’s viability in the People’s Republic. A digital dollar could potentially do the same in the United States, threatening Bitcoin’s total $ 1 trillion market cap value. To combat this, we need to use blockchain technologies for more than just transactions. Projects like Ethereum have already moved on to NFTs, creating electronic deeds for works of art and collectibles. Others like Celsius (CCC: CEL-USD) allow users to borrow and lend money like a commercial bank. The latest in the industry – Internet Computer – promises to use decentralized networks for cloud computing and website hosting. Bitcoin, however, has failed. His current projects focus on minor wallet enhancements and bug fixing rather than the drastic changes he needs to keep pace. There is a good reason that early cryptocurrency investors ditched the heavy technology of Bitcoin. You should, too, while you still can. As of the publication date, Tom Yeung does not hold (neither directly nor indirectly) any position in the securities mentioned in this article. Tom Yeung, CFA, is a Registered Investment Advisor whose mission is to bring simplicity to the world of investing. No more InvestorPlace Stock Prodigy who found NIO at $ 2… Says Buy THIS Now It doesn’t matter if you have $ 500 in savings or $ 5 million. Do this now. Top Stock Picker Reveals Potential Next 500% Winner The Message As Bitcoin prices slide below $ 40,000, should you buy down or sell? appeared first on InvestorPlace.