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Bitcoin: Buy the Dip?

By Anders Bylund - May 19, 2021 at 2:37PM

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The household-name cryptocurrency is trading dramatically lower again. Here's why, and what you should do next.

Newsflash: Bitcoin (BTC -3.14%) prices are volatile and unpredictable! Film at 11.

Alright, that's not exactly news but Bitcoin's wild swings might present a buying opportunity right now. The leading cryptocurrency's tokens are changing hands for $43,800 today, more than 30% below April's all-time highs of $64,829 per token.

Is this the start of another painful plunge that will last for years, or is it a temporary dip where investors can build their Bitcoin holdings at a generous discount? Let's take a look.

A person puts a coin with the Bitcoin logo in a piggy bank.

Image source: Getty Images.

Who decides what Bitcoin is worth, anyway?

First things first: My time machine is in the shop and my crystal ball was just a cheap knock-off. Always in motion is the future and I can't claim to know for sure what will happen.

That's particularly true when we're talking about cryptocurrencies. You can argue that stocks have an intrinsic value based on the company's business results, price-to-earnings ratios, dividend growth models, and so on. Traditional currencies like the U.S dollar or the Japanese yen are backed by entire countries and their carefully crafted monetary policies. None of that applies to digital currencies, whose market value largely depends on trust and popularity.

A cryptocurrency that is held by a lot of people, companies, and organizations is more valuable than one that is rarely found in the wild. A thriving community of active users results in a useful currency that can pay for products and services, store value in the long term, or take advantage of built-in features like the smart contracts of Ethereum (ETH -3.85%) or the privacy-boosting attributes of the Basic Attention Token (BAT -1.62%).

Establishing trust is the way to build a large and active user base. If you build a secure store of value comparable to gold, they will come. If you build a reliable, low-cost transaction settlement system, they will come. In Bitcoin's case, the currency can be used to buy things but the transaction costs are relatively high, and the managing group's ultimate aim is to rival or outshine gold as a long-term store of value.

Difficult market action

Bitcoin's stable value idea was supported by strong price gains over the winter. Financial institutions started treating the largest cryptocurrency as a legitimate asset class, worthy of inclusion in their clients' financial portfolios. A handful of companies swapped out some of their cash reserves and low-yield bonds for Bitcoin tokens, led by business intelligence specialist MicroStrategy (MSTR 3.40%) and electric car giant Tesla (TSLA 0.78%). In short, Bitcoin started to look like a respectable investment.

That groundswell of public support faded this week. There are many secondary reasons behind this negative trend, but one market-moving figure towers over the rest. Tesla CEO Elon Musk had a change of heart, promising not to buy any more Bitcoin until he knows that the coins were mined using 100% renewable energy.

The environmental focus does make sense, given Musk's long-term goal of replacing the world's fossil fuels addiction with solar panels, wind towers, and other alternative energy sources. Musk's complaint, along with the implication that Tesla might sell its Bitcoin holdings, drove cryptocurrency prices sharply lower.

However, other crypto-friendly business leaders were quick to point out that Bitcoin's environmental impact may not be that bad.

  • Morgan Creek Capital Management co-founder Anthony Pompliano pointed out that 75% of Bitcoin miners rely on alternative energy already, leaving a small slice of damaging coal-based mining operations in the market.
  • MicroStrategy CEO Michael Saylor, who played a significant part in Musk's earlier cryptocurrency bullishness, noted that "the net impact on fossil fuel consumption over time will be negative, all things considered." Bitcoin transactions use almost no energy and the heavy-duty mining work supports the security of Bitcoin's blockchain network.
  • "When Elon realizes that bitcoin mining is actually pushing the renewable energy industry forward, he will refresh position and #bitcoin will moon," tweeted Gemini Trust co-founder Cameron Winklevoss.
A wizard using a crystal ball in the dark.

Image source: Getty Images.

What comes next?

Elon Musk has an almost hypnotic control of the cryptocurrency market. One might think that he would use that power to increase the value of Tesla's Bitcoin holdings, but his actions had the opposite effect this week. The mercurial business genius may very well flip-flop again, unleashing another whipsaw sea change to Bitcoin and other digital currency prices.

This, too, shall pass. In the end, investors and business leaders must push their Musk obsession aside and decide whether they trust Bitcoin for its long-term purpose. Again, I don't have a reliable crystal ball, but I will say that the global economy could use a few borderless financial tools. As the original top dog in the digital currency field, Bitcoin has established itself as the most likely winner in the long run.

There are limits here but Bitcoin does look like a reasonable buy at these lower prices. Don't bet the farm, don't borrow money to trade Bitcoin on margin, and don't expect a smooth ride to the moon or the treetops. The ride will absolutely be bumpy and the whole idea may actually fail.

So feel free to dip your toes in the Bitcoin market today. Just be careful out there.

Anders Bylund owns shares of Basic Attention Token, Bitcoin, Ethereum, and Tesla. The Motley Fool owns shares of and recommends Bitcoin and Tesla. The Motley Fool recommends MicroStrategy. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Bitcoin Stock Quote
Bitcoin
BTC
$23,395.24 (-3.14%) $-758.20
Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$871.27 (0.78%) $6.76
MicroStrategy Incorporated Stock Quote
MicroStrategy Incorporated
MSTR
$330.01 (3.40%) $10.86
Ethereum Stock Quote
Ethereum
ETH
$1,718.47 (-3.85%) $-68.88
Basic Attention Token Stock Quote
Basic Attention Token
BAT
$0.44 (-1.62%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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