Should You Buy Bitcoin After The Price Drop? Buy While It’s Weak

Bitcoin Cryptocurrency concept

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Investment Thesis

There are many discussions about Bitcoin’s (BTC-USD) potential crypto winter in 2022, as crypto bears have clamored for. We find it interesting that such sentiments were nowhere to be seen at Bitcoin’s November peak. But investors who have developed a certain level of crypto investing finesse would have sounded the alarm of a potential top then. But, we saw a tremendous amount of hype during those days, exacerbated by an exuberant media as well.

We encourage crypto investors to consider the long-term thesis of the crypto leader. Despite the emergence and ascendence of new digital assets in 2021, Bitcoin is still the flagship coin for many crypto investors. It remains the leading crypto exchange Coinbase’s (COIN) most important crypto asset by trading volume in the first nine months of 2021. Moreover, institutional investors have continued to dominate crypto assets trading, as seen in Coinbase’s previous quarter results.

Moreover, a recent report by Glassnode also showed that long-term holders are unperturbed by Bitcoin’s recent significant slide. In contrast, they have taken the opportunity to accumulate Bitcoin from the hands of the weak, overleveraged short-term traders, who were “forced” to sell during the volatility. Furthermore, KPMG Canada’s recent purchase of Bitcoin and Ethereum (ETH-USD) (undisclosed amounts) has also lent credence to Bitcoin’s legitimacy. While its move has drawn criticisms of a marketing ploy, we believe it has created further corporate interest in Bitcoin and Ether. Furthermore, India and Russia have also decided not to ban crypto assets (at least for now) but have introduced regulatory mechanisms to live with them. Therefore, we believe that such moves have a positive impact on the long-term outlook for crypto assets, notably for Bitcoin as the leader in the crypto world.

We discuss why investors should take the opportunity of Bitcoin’s recent weakness and accumulate more exposure.

Bitcoin is Still the Most Widely Traded Crypto Asset in Coinbase

Coinbase is one of the world’s top ten crypto exchanges by trading volume, according to data from CoinMarketCap. In its last quarter results, Bitcoin remains its most widely traded crypto asset through the first nine months of FY21. It accounted for 27% of its trading volume, followed by Ether at 23%. Notably, it has dropped significantly from its 45% share in the previous year as Ether and other crypto assets gained share. But, we don’t think it represents a demise of its legitimacy. Considering the “explosion” in crypto assets trading volume in Coinbase to $1.12T in the first nine months of FY21, up from last year’s $104B, it’s easy to see why. It meant that Bitcoin’s trading volume in Coinbase surged to $303.5B in the first nine months of FY21, up from just $46.8B in the previous year (up 549% YoY). What demise and irrelevance are we talking about? We think it represents the ongoing adoption and maturity of crypto assets as a whole, as more investors jump on board.

Furthermore, investors should duly note the participation of institutional trading in Coinbase. Coinbase’s numbers continue to demonstrate the momentum in adoption from institutional investors/traders in crypto assets. It was a huge shift from what we observed just a year ago. For instance, institutional investors accounted for $63B in trading volume, compared to $41B in retail volume in the first nine months of FY20. However, institutional volume surged to $766B, compared to $358B in retail volume in the first nine months of FY21. Therefore, it is clearly represented the huge momentum shift from retail to institutional trading. While retail volume is still significant and has often resulted in previous wild swings in Bitcoin, the ongoing adoption by institutional investors could reduce the volatility in the future. We believe that institutions and corporations that choose to adopt Bitcoin as an asset class on their balance sheets have a long-term view.

Tesla’s 10-K Could Unveil Why Corporations are Still Hesitant on Bitcoin Adoption

The recent volatility in equity markets has also rocked the momentum in crypto assets, including Bitcoin. We also shared in a previous article that the correlation between Bitcoin and the US equity market has gotten closer than in previous years. While it may have weakened the near-term catalysts in Bitcoin, we believe that the long-term adoption by institutional investors is still in the early innings. Therefore, we believe that investors should capitalize on the current volatility and weakness in Bitcoin before more institutional investors and corporations join the bandwagon. Graticule Asset Management Asia also highlighted how the recent equity market volatility has slowed down the adoption by institutional investors, albeit momentarily. It added (edited):

Growth stock volatility amid rising interest rates is temporarily slowing institutional investors’ planned forays into cryptocurrencies. Although the decision to allocate into crypto has already been made by many traditional institutions, but most have been slow to actually invest. They don’t want their first foray into the space to be a money-losing proposition quickly. We think institutional allocations will wait until the global equity markets, particularly growth equities, have stabilized. (Bloomberg)

We believe that it makes sense, especially for corporations who have decided to invest in Bitcoin. But, the current accounting rules are “not beneficial” in the way these companies need to account for their Bitcoin holdings on their balance sheets. Especially, if they have a long-term perspective (not trading in and out regularly). We can certainly glean some wisdom from Tesla’s (TSLA) move to adopt Bitcoin in 2021. For instance, Tesla highlighted in its FY21 10-K recently (edited):

Digital assets are considered indefinite-lived intangible assets under applicable accounting rules. Accordingly, any decrease in their fair values ​​below our carrying values ​​for such assets at any time due to their acquisition will require us to recognize chargeswhereas we may make no upward revisions for any market price increases until a sale. For any digital assets held now or in the future, these charges may negatively impact our profitability in the periods in which such impairments occur even if the overall market values ​​of these assets increase. For example, in the year ended December 31, 2021, we recorded approximately $101 million of impairment losses resulting from changes to the carrying value of our bitcoin and gains of $128 million on certain sales of bitcoin by us. (Tesla’s FY21 10-K)

Therefore, we can understand the trepidation by corporations who have decided to invest in Bitcoin but are concerned about how impairment charges could affect its quarterly results. It’s a valid consideration. But, we are also confident that the equity market will find its upward momentum in 2022, consistent with what Graticule Asset Management Asia indicated above. Unless you believe that we are in a multi-year secular bear market, we are confident that the US equity market will find its footing again. Therefore, it should help placate and assure more institutional investors to allocate more Bitcoin holdings. Notably, Tesla’s carrying value of its Bitcoin holdings is about $1.26B as of 31 December 2021. It also held a cash & short-term investments balance of $17.71B. Therefore, it represents less than 10% of its cash and equivalent holdings. According, we think there’s tremendous potential for Bitcoin moving forward when more corporations start to allocate some of their cash holdings to Bitcoin for the long term. And why Bitcoin? We think the less volatile nature of Bitcoin compared to other crypto assets, in general, is more constructive for corporate adoption.

Block, Inc. (SQ) CEO Jack Dorsey also highlighted in a recent Bitcoin conference organized by MicroStrategy (MSTR). He added (edited): Slow things tend to last and be more predictable and secure.”

Buy Bitcoin Now While the Corporations Are Still on the Sidelines

We highlighted in our previous article that Bitcoin’s price action is constructive to go long on Bitcoin now. But we have a long-term perspective on the crypto leader. So, you shouldn’t consider our views if you regularly trade in and out of Bitcoin.

We believe the question of institutional adoption has been answered in Coinbase’s numbers. Therefore, now is a matter of waiting for the equity market to stabilize before more corporations could potentially join the bandwagon forward. So, don’t wait till then.

As such, We reiterate our Buy rating on Bitcoin for long-term crypto investors only.

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