Bitcoin’s surge to $50,000 for the first time has created a new acronym: HOFDL—Hold On For Dear Life. “Hof-del” captures both the buy-and-hold strategy driving Bitcoin higher and the cryptocurrency’s inevitable volatility in the future.
“Bitcoin is the gold standard of cryptos,” Dr. Richard Smith, CEO of The Foundation for the Study of Cycles, a non-profit research institution based in Pittsburgh, told Newsweek. “There is a fixed number of Bitcoin. Many holders have a ‘never sell’ attitude and we haven’t seen that before.”
Bitcoin recently fetched $51,242.71, just off the all-time high of $51,735.38, CoinDesk reported.
The number of Bitcoins worldwide is capped at 21 million. Between August and December 2020, an estimated 150,000 new coins were mined, but nearly 360,000 were bought.
The difference between new supply and current demand has driven prices higher. In 2021, Bitcoin is up about 68% and coins in circulation are valued at about $909 billion.
“I think Bitcoin could go to $100,000 or $200,000,” Smith said. “That’s the price you pay for being in a highly speculative asset that no one truly knows what its value is. I think we’re closer to a cycle top than a bottom. There’s massive speculative activity in options, penny stocks and Bitcoin. When speculation becomes this rampant, it doesn’t end well.”
It’s difficult to recognize a market top as prices continue to rise—and that crushed many investors in Holland’s tulip mania in the 1600s, the first documented market bubble.
Bryan R. Smith / AFP/Getty
But there are basic steps cryptocurrency investors can take to prepare for what Smith sees as Bitcoin’s inevitable, if temporary, downturn.
“If you’re looking for a 100% gain, you should be OK with a 50% short-term loss,” Smith said. “Think about risk and reward because that’s where those who get caught up in feeding frenzies drop the ball.”
Some may sell Bitcoin in the next downturn to limit losses, but that may create a buying opportunity for long-term investors. It’s often said that Wall Street depends on the “greater fool” for driving prices higher.
Savvy traders knowingly overpay for a stock because they know they can sell quickly at a higher price to the greater fool who is often hit with a loss when over-priced shares retreat. But that doesn’t appear to be the case with Bitcoin because most investors buy and hold the cryptocurrency, betting the price will increase. Some see Bitcoin as a hedge against inflation.
However, Bitcoin’s value won’t increase in a straight line, and there are bound to be dips and even a few troughs ahead, Smith said. Many people buy a house as an investment, betting that its price will rise and allow them to move into a bigger house in a better neighborhood in a few years.
Smith said the rise of Bitcoin may mean that some couples buy Bitcoin as a bet on a price appreciation and rent to keep current expenses low.
“There’s a scarcity of Bitcoin, but no shortage of housing,” he said. “I don’t want to sound like Pollyanna, but I think there are some paradigm-changing things going on that some don’t fully appreciate, and I think that’s what’s driving people’s desire to acquire Bitcoin.”
However, a Goldman Sachs analyst believes Bitcoin is too volatile to be a medium of exchange. Nevertheless, Bitcoin is driven by more than the expectation of rising prices, Smith said.
Paul Morigi / Getty Images for Fortune
Google, Facebook and other Internet companies offer free services by turning the customer into the product. Personal information is sold and ads are pegged to an individual’s income, education level, place of residence—you name it.
Growing concern about the need to keep personal data private and massive Federal spending as part of the effort to stabilize the economy during the COVID-19 pandemic also drive interest in Bitcoin, Smith said.
“Questions of data sovereignty are starting to pick up and will be increasingly important,” Smith said. “That’s why we see an accelerated interest in Bitcoin, and it’s coincidental with the (coronavirus) pandemic.”
Bitcoin’s use of blockchain, an unbreakable transaction ledger, has the potential to upend current Internet business models and become a preferred medium of exchange, he said.
“Data are becoming increasingly valuable, and you need a way for it to be freely exchanged on the Internet while protecting the rights of the data owner,” he said. “The free exchange of data is an asset.”
Bitcoin investors need to define their goals, accept risk and know when to sell before asking, “How high is up?” An analyst at JP Morgan believes Bitcoin’s value could reach $146,000, but another says the cryptocurrency could go twice as high.
“It’s a decentralized revolution in the way we store and share value,” Jesse Benton, president of the Digital Asset Policy Network, a Washington-based think tank, said in a statement. “Bitcoin will always have short-term volatility. The question is not what the price will be tomorrow or even in six months, but in three years or five years. The long-term upward trend will continue and Bitcoin will in several years be worth north of $300,000.”