Bitcoin is back above $9,000 this week, so clearly the great selloff is over. Or is it?
There are lots of reasons to like Bitcoin, notably the blockchain technology it pioneered that is taking over the way money moves from person to person. However, there are a lot of reasons to take whatever money one has in the product and leave this coin altogether.
The Group Mentality Risk
There is an old saying that when the taxi driver and shoe shine guy is buying something, it's time to sell.
The Bitcoin run-up was a classic case of groupthink. My neighbor is buying Bitcoin, the product is getting hyped by the exchanges, the Winklevoss Twins own a ton of Bitcoin, they thought of Facebook before there was Facebook, how could they be wrong?
Bitcoin's run-up above $19,000 was driven by uneducated retail investor seized by FOMO, the Fear of Missing Out. The retail groupthink ran Bitcoin up at an unbelievable pace as money poured into the product, mostly in Asia.
Regulatory Risk
One of Bitcoin's strengths is how easy it is to move from one country to another. This is also its weakness.
Countries in Asia began putting the reigns in on investment in Bitcoin. Governments, especially countries like China, hate this. The control of money flow is one of the key ways the U.S. stops things like money laundering, and a country like China keeps control on its citizens. The big selloff was caused by one thing, and this is huge: regulatory risk.
Regulation in general is bad for just about anything. Look at the chart of FANG stocks. Since the risk of regulation because a serious risk, the entire complex has been much more volatile and has underperformed the previous several years.
I hate owning assets when the risk of changing regulation is high Bitcoin is a prime example of high regulatory risk. This raises alarm bells. I think there is a strong chance that Bitcoin is forced into the monetary regulatory web, thus the product loses a chunk of what makes it so special.
Slower Speed
The next issue with Bitcoin are the damaged investors. The retail world that drove Bitcoin's price so high is licking its wounds. They are not likely to jump in again. Each person left 'holding the bag' is looking for a chance to dump the product.
As it hits milestones, Bitcoin will face enormous selling pressure from the retail public. If it does get to $19,000 again, it will take years, not weeks, like it did last time.
Not the Only Game in Town
Finally, there are coins that are much better than Bitcoin. They move faster and have the backing of some big players. Ripple and Litecoin are both well-established and have much quicker transfer procedures. One of the drivers of Litecoin's run-up was traders using it to move money between exchanges in order to arbitrage Bitcoin pricing on different exchanges.
I think there will be a definite cryptocurrency winner, probably Etherium, Ripple or Litecoin, I am not sure Bitcoin is the winner in the crypto space. CryptoKitties, a blockchain game to breed cats, used Etherium's network.
While blockchain is amazing and cryptocurrency is here to stay, it does not mean Bitcoin has a future. I would look at the run-up in Bitcoin as an opportunity to sell and move assets to the cryptos that will win.
This commentary was originally published April 27 on Real Money Pro, our site for active and options traders. Click here to get daily market commentary and trade ideas from Mark Sebastian, Paul Price, Doug Kass and many others.
