Taking a five-year view on bitcoin – is it a hold?

Bitcoin’s notorious volatility may have softened in the last year, but don’t expect it to disappear altogether.

After hitting a previous peak of $20 000 in December 2017, bitcoin fell 84% over the following year to a low of about $3 500 before recommencing its next bull run, which took it to a new all-time high above $63 000. The exhilaration of these wild swings is what draws an ever-growing community of traders and risk-hungry investors to bitcoin.

Bitcoin has shown itself capable of dropping 20% in a day or two without disturbing its overall bull pattern. This makes it a prized asset for traders seeking to profit from rapid price swings.

However there are great ways to make money in crypto without taking risk, such as buying overseas and selling in South Africa for a profit. This practice is called arbitrage and is making South Africans relatively risk-free profits. Find out more about arbitrage today.

Several factors are behind bitcoin’s volatility:

The news cycle: US Treasury Secretary in February warned that bitcoin was an “extremely inefficient” way to conduct monetary transactions, prompting a 20% drop in price. But that was after Elon Musk announced his company Tesla had bought $1.5 billion in bitcoin, promoting a nearly 30% surge in price. Bitcoin is jittery around talk of restrictions and regulations, but even when countries like China, Pakistan and Nigeria have ramped up regulatory barriers to crypto entry (usually by cutting ties between exchanges and the banking sector), the price has quickly recovered from the bad news.

Changing perceptions around bitcoin’s store of value: there will only ever be 21 million bitcoin issued, so the supply is fixed (notwithstanding its near infinite sub-divisibility). The only other factor that can change is demand, which is influenced by investor perceptions of risk. Those perceptions remain acutely high at present due to the extraordinary level of money printing being undertaken in the US by the Joe Biden administration. Bitcoin has shown itself to be the fastest growing assets of the last decade, and possibly of all time.

Rate of adoption: originally confined to techies and cryptographers, bitcoin is now reckoned to have more than 100 million people who own or have owned the coin. By some predictions, crypto adoption will reach one billion with the next decade. Not all of these will be bitcoin holders, but many will be. Countries with exchange controls and high inflation have seen a marked increase in adoption from citizens trying to protect their wealth against government currency debasement.

No central control authority: this is a key factor in bitcoin volatility. This is an attraction for many who regard central bank money printing programmes as the ultimate in monetary recklessness, while others prefer to stay away from something that does not enjoy the oversight of central bank supervisors.

Bitcoin halvings: the rate at which bitcoin is mined is halved every four years, and this has been shown to have a profound impact on price. The previous halving was in 2020, and the next one is in 2024. There is no direct correlation between halving and price, though the previous two halvings preceded a major upward push in price over the following two years.

Price predictions

Bitcoin has grown at an unbelievable 200% compound annual growth rate per year for the last decade., which means it has very little correlation to traditional risk assets.

The fact that this has happened historically is certainly no guarantee the pattern will continue, especially as we have already seen the potential for massive drawdowns. But this does give us a benchmark against which to gauge future movements in price.

Ovex CEO and founder Jon Ovadia sees a price north of $250 000 as an achievable target within the next five years. “This is an achievable target given the expected increase in the rate of bitcoin adoption over the coming years and, by some estimates, may be on the conservative side. Either way, it would be prudent for most investors to hold at least some bitcoin with a view to capitalising on the growth of this new financial architecture that will sweep the world over the next decade.”

Ovex’s arbitrage service

Another, relatively safe way to gain entry to cryptocurrencies is through crypto arbitrage. Ovex was founded more than three years ago to offer companies and retail investors access to crypto arbitrage – making risk-free profits from price differences on cryptos in different markets. Cryptos like bitcoin can typically be bought on overseas exchanges and sold in SA at a slight premium, generally between 2% and 4%. Rather than scouting arbitrage opportunities with bitcoin, Ovex found that arbitrage profits are more predictable using a stablecoin called TrueUSD, which is backed 1:1 by the US dollar. TrueUSD is issued by San Francisco-based TrustToken.

These arbitrage opportunities are available in most countries with exchange controls, though the arbitrage gap varies depending on demand. A stablecoin, though backed by a regulated currency like the US dollar or rand, is a crypto asset that is often used by investors to park profits made on other cryptos in a safe asset that does not move in tandem with the rest of the market.

Ovex’s OTC desk

The larger part of Ovex’s business is an Over-The-Counter (OTC) desk that allows large buyers of crypto assets to get rapid settlement without the risk of moving the market.

This is important for companies or family offices that may be looking to diversify into crypto assets like bitcoin. A large purchase of say R20 million or R50 million would get noticed on regular exchanges and drive prices up. Ovex is able to eliminate this problem by settling large crypto orders in a way that does not move the market. It does this because it has deep financial backing and sophisticated computer systems.

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Brought to you by Ovex. 

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