They Interrogated Me, So I Bought Bitcoin

By TradeSmith Research Team

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On Tuesday, I wrote two good friends of mine and told them I was buying bitcoin. I said that I think it could triple in the next couple years.

And do you know what their reaction was?

Both of them thought I was a scammer. They assumed I was “hacked” by some imposter trying to deceive them. One even made me confirm the names of my dogs… and where I met my better half.

“Answer the question,” she demanded. I could practically feel the heat of a dingy lightbulb swinging overhead.

Keep in mind, both of these friends have heard of and even bought bitcoin back in 2021. They aren’t experts, but this was nowhere near the first time we’ve talked about it.

You’d think this reaction might make me second-guess my bullishness on the King of Cryptocurrency. But it had just the opposite effect.

You see, the masses — I love my friends, but they’re very much “the masses” — are still sour on crypto. Their current sentiment toward bitcoin tells me we’re early to the trade. There’s plenty more gains ahead before their fear turns back into greed.

So after that conversation, I bought even more. And I’ll probably keep buying more as we enter 2024.

Today I’ll share more about why I’m doing this… Show you a few ways you can play it in the stock market… And tell you what one of TradeSmith’s newest and best-performing trading talents said about bitcoin to his readers earlier this week.

Why Bitcoin Now

At writing, bitcoin is up 18.5% over the last five days. That’s a cool $100 billion in market cap. And it’s enough to break its long-term downtrend.

We’re seeing these gains due to rumors that a bitcoin ETF backed by spot holdings from BlackRock, the first of its kind, is about to be approved by the SEC.

Chances are you’re in one of two camps about this:

  1. Maniacally shouting “I TOLD YOU SO” from your rooftop.
  2. Simultaneously scratching your head and kicking yourself for selling last year (or ever).
I’m in camp 1 (though, using my inside voice).

I’ve long expected bitcoin prices to continue rising this year, after surging alongside the broad market recovery in March. But it’s not because bitcoin is a “leveraged bet on tech stocks” as some believe. Nor because of the ETF listing, either.

No. Aside from the ETF rumblings, I chiefly see bitcoin’s recent price rise as intimately tied to the reason why Treasury yields recently spiked higher.

Bitcoin is, as it always has been, a mark of bitter distrust toward U.S. fiscal policy.

It’s one of few truly neutral wealth shelters outside of gold and silver bullion (which also have a place in every portfolio). It can help you separate your money from the morbidly fascinating decisions of our harebrained world leaders, by letting you transact with anyone in the world without a middleman.

Not to mention, it’s had this strange, consistent habit of shocking the financial world with monumental price gains every few years.

That’s enough to get bitcoin going.

But we’re six months away from an event that should catalyze bitcoin’s price gains even higher, right on cue…

Bitcoin Miners and the Halving

Part of the reason many theorize bitcoin goes up so consistently over time is the “halving.”

This is an event where, about every four years, the reward for mining bitcoin falls by 50%. This makes it so bitcoin becomes harder to mine over time, constricting supply.

So long as demand rises for bitcoin and people keep buying it, this should have a deflationary effect that takes bitcoin prices higher and higher.

The beauty of this system is that, if bitcoin rises in price, the impact of the halving on bitcoin miners is mitigated. At higher bitcoin prices, they can still make higher profits even with a 50% reduction in supply.

This event is coming up again, in April. And should history rhyme, bitcoin prices will charge higher just as they did after previous halvings. Take a look at that same chart from before, with halvings marked by yellow lines.

So, let’s say you’ve never bought bitcoin and this all sounds crazy… but intriguing.

However, you still don’t want to put your money into bitcoin because it’s not regulated like the stock market.

It’s a fair point. Bitcoin is the lowest-risk asset in crypto, but that still makes it much higher risk than almost any stock of a similar valuation. And holding it carries none of the protections you get from holding a regulated security.

So, what to do?

The way I see it, there are two options of different risk tolerances:

  1. Buy bitcoin proxies. These are securities that track the price of bitcoin — your plug-and-play solution. There are a couple quality tickers in this space.

    You have the Grayscale Bitcoin Trust (GBTC), currently the best way to own an asset backed by bitcoin. Just be wary of its net asset value (NAV) premium/discount mechanism, which can actually have you pay above (or below) the value of bitcoin. Right now, it’s at a 14% discount, which is kind of (but not exactly) like buying bitcoin for 14% off.

    For a more pure play, the ProShares Bitcoin Strategy ETF (BITO) is a good bet. This ETF more closely tracks the performance of bitcoin without a large discount or premium to its NAV.

    And of course BlackRock’s new ETF, rumored to be the iShares Bitcoin Trust (IBTC), will be another option if and when it becomes available.
  2. Buy bitcoin miners. This is where we put on our analyst hats and roll up our sleeves.

    There are a ton of publicly traded bitcoin mining companies, but today I’ll just mention the two biggest: Riot Blockchain (RIOT) and Marathon Digital Holdings (MARA). Both are around a $2 billion market cap.

    These are different from buying bitcoin or bitcoin proxies. They stand to benefit from higher prices, but also have a lot to lose once bitcoin mining yields halve in April.

    These are also companies, made up of ever-flawed human beings, making decisions about how to mine, store, and transact bitcoin.

    What I’m saying is there are additional layers of risk here that have nothing to do with the asset itself. Do your homework on these and treat them as high-risk plays.

With that in mind, I want to do something special and share what the Trade Cycles indicator — a proprietary stock-forecasting tool created by TradeSmith — says about one of these stocks.

Here’s RIOT:

There’s a lot to unpack here, so let’s get started.

The shaded blue and orange areas on the chart are Valley and Peak zones, respectively. When an asset enters the blue Valley zone, that’s a broad-based buy signal. When it’s trading in the orange Peak zone, that’s a broad sell signal. Every asset goes through Peaks and Valleys over time, and those zones are unique to each asset.

Now, those zones on their own aren’t enough to confirm where a stock will go next one way or the other. To confirm these signals, we want to look at the purple cycle lines themselves.

The dark purple line, oscillating between the Peaks and Valleys, is the short-term signal line. This gives you a rough idea of which direction the stock will move when it’s in each zone.

The lighter purple, composite cycle line is an amalgam of an asset’s currently available cycles, depending on how long the asset has traded. This helps forecast the short-term trend.

Lastly, look at the Volume-at-Price indicator on the lower left. This shows us the price where most traders are buying or selling the stock.

As we can see in the case of RIOT, the stock is exiting a Valley zone and the composite cycle is trending up. It’s also coming right up towards a price level — around $12 — where there’s been substantial selling pressure, but also the most buying pressure in months.

This sets up a solid place to buy RIOT until it hits its Peak zone, where we would look to sell it.

Naturally, this is a very short-term strategy for those preferring not to buy and hold a volatile asset like a bitcoin miner. And you can certainly make good money trading this way.

My colleague William McCanless, editor of Trade Cycles by TradeSmith, is proof of just that.

Trading Bitcoin Without Bitcoin

On October 4, William McCanless saw into bitcoin’s future.

He used the Trade Cycles indicator — along with eight years of investment experience — to see that bitcoin was about to surge in price.

And so he recommended a trade on BITO — the ETF I just told you about — to his readers.

Less than three weeks later, he closed out the trade and pocketed a 23% gain.

That’s pretty impressive. But what I really want to highlight is this little tidbit from the sell alert (emphasis mine):

I’m peeling off our trades right now in anticipation of a new round of trades coming up tomorrow-ish, as I mention in today’s weekly update with QQQ. If there is a pullback and an opportunity to re-enter a Bitcoin trade later, we may do that. In any case, I think overall — over the next 12–24 months or so — we’re about to see $100,000 to $200,000 Bitcoin prices.

William believes, just as I do, that we’re looking at a six-figure bitcoin price in the next two years.

This passage, along with a conversation I had with William that I’ll share tomorrow, is part of what got me to ultimately pull the trigger on my bitcoin buy.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily