When such a comparison is made, one has to wonder what on earth our beloved bitcoin and a Boeing 747 have in common? At first glance, airlines and digital currency might seem as if they are at opposite ends of the spectrum.
But let’s take a closer look…
The price of bitcoin, and shares of companies within the airline industry (airlines, manufacturers etc.) are heavily cyclical assets. They go through boom and bust phases, depending on a range of drivers and influences.
Despite many people talking about how bitcoin is in a bubble, a quick glance at the trends tells us that bitcoin is following a relatively logical pattern.
Bitcoin is a heavily cyclical asset
Here are some interesting graphs drawn up by LewisGlasgow at TradingView that examine the peaks and troughs bitcoin has gone through over the past few years:
As we can see here, bitcoin has gone through numerous growth and decline phases. However, they are following an upwards trend line.
‘Okay great, we’re looking at a chart here. But what drives the price of bitcoin?’
Being a relatively new asset, we’re still working out what causes people in the market to buy and sell bitcoin. However, here are some of the more established factors that influence the value of bitcoin:
Market sentiment and whether bitcoin is overbought or oversold (short term).
- Fear of missing out (FOMO) during price rallies and fear of loss during crashes.
- Difficulty/cost of mining bitcoin compared to the price – the miner’s margin (medium term).
- If the cost of mining bitcoin is higher than the price, this provides an incentive to buy bitcoin.
- It also provides an incentive for miners to pause their computational activities until block validation becomes profitable again.
- When the price of bitcoin rises, the incentive to mine bitcoin also increases, resulting in more mining competition, increased block difficulty and a higher mining cost.
- This ingenious economic programming helps to provide a cost backing to any major gains. The difficulty then adjusts in due course to take into account sustained price declines.
- More information about the cost of mining bitcoin around the world can be found here.
- Regulatory outlook – during 2017, we witnessed significant price movements as a result of China announcing their hostility towards ICOs and cryptocurrency, and Russia warming to the idea of blockchains.
- Accessibility of cryptocurrency for the average investor – as it becomes easier to buy and sell, more retail investment capital will flow into bitcoin.
- Hedge funds investing in bitcoin are bringing wholesale volumes of capital into the bitcoin ecosystem.
- Social proof from celebrities, business magnates and investing titans brings retail interest to bitcoin.
- Quantitative easing and monetary policy – over the past decade, central banks around the world have printed trillions of dollars, effectively diluting the real value of fiat currency. To prevent rampant inflation, we have seen an extreme reduction in interest rates over the same period… Bitcoin is limited in supply, making it a great hedge against irresponsible monetary policies.
If you’re interested in learning more about the reasons why people buy bitcoin and other cryptocurrencies, check out this detailed analysis piece.
Just like bitcoin, every cyclical asset has drivers that influence the market
Cyclicality of the airline industry
This chart is of UAL – one of the worlds largest airlines:
Over the past 10 year period, we can see that there have been multiple rallies and declines (with the overall trend moving upwards).
Another airline industry ETF is the XYN fund:
“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. “ – George Soros
The main factors that influence the price of airline shares are:
- State of the economy – when things are going well, people have more discretionary income, and so they spend more on travel. Airlines have large overheads, and therefore need to fill seats in order to cover their costs. Any significant drops in capacity can wipe out the profits of an airline and reduce the price of its shares.
- Oil price – one of the main costs of running an airline is fuel.
- Exchange rates – international airlines typically deal in multiple currencies. Conversion rates affect their bottom line.
- Interest rates – many airlines borrow money to finance infrastructure such as airplanes and upgrades. The cost of borrowed money is an important factor to consider.
Almost every industry is at some point in a cycle
By understanding the cyclical trends of an industry or asset, we can get a better idea of what to expect moving forward. This analysis looks at how the oil industry is nearing a peak, and is likely to decline in the near future.
“Before we know it, U.S. will be the world largest oil producer and then Saudi Arabia and Russia will wake up to a new reality in which oil prices has to go down.”
Contrastingly, this analysis compares the gold market to property prices to help determine when we will have the next gold boom.
As an investor, it is important to allocate your funds in a way that allows you to take advantage of market cycles. As we will explain in a moment, dollar cost averaging is a great way to make the most of this bitcoin bear market by building up a position over time. By contributing the same amount each week, fortnight or month, dollar cost averaging encourages you to purchase more units of bitcoin at a lower price and less units at a higher price.
Where in the cycle is bitcoin at the moment?
As we can see from this bitcoin price analysis, the last cycle which peaked during mid-December 2017 has finished. Throughout the first half of 2018, we saw a significant price decline (roughly 70% from December 2017 highs).
Looking at the price trend of bitcoin, it would suggest that we are in a consolidation phase at the moment, with the next rally likely to arrive soon. The last boom phase was marked by ICO madness on the Ethereum blockchain, bitcoin forking, celebrity endorsement and the general public becoming more aware of the innovative potential that blockchains present (and the profits that are being made by early adopters).
Whilst we don’t know what will cause the next major market expansion, there are signs that significant growth might come from investment funds stepping up the amount of capital allocated to cryptocurrencies, ICOs becoming more regulated and attracting larger amounts of funding, or maybe the fact that bitcoin is much easier to access than it was just a year ago.
What does this mean for investors?
Just a few years ago, bitcoin was still relatively unknown to the mainstream public, and as a result, the market cap was quite small. This meant that news events, and wealthy individuals could easily influence the market in big ways – it was subject to extreme levels of manipulation.
However, in the past 2 years, we have seen a major influx of investment into the cryptocurrency space. At the time of writing, the market capitalization of bitcoin was over $110bn. With more money flowing, and a wider range of people and organizations holding bitcoin, it is much harder to influence the market, and cyclical trends are becoming even more entrenched in the price action of bitcoin.
As larger amounts of capital enter the market, and bitcoin becomes more accessible to the general public, the cyclical trends of bitcoin are likely to become even more established.
“More liquid markets with institutional capital entering the space is ultimately going to decrease that volatility and make digital currencies like bitcoin a really viable financial instrument for the world.” – Chris Burnside, Placeholder
We don’t have a crystal ball – do you?
Rather than buying lump sums of bitcoin when the price is perceived to be is low and trying to predict the market, there is another way. It’s called dollar cost averaging.
Dollar cost averaging is where you purchase the same dollar amount of an asset on a regular basis – for example, $50 per week.
“Dollar cost averaging minimizes the downside risk associated with purchasing a lump sum of an asset right before the price drops. Some other benefits of dollar cost averaging include:
- Forces the investor to purchase fewer units at a higher price and more units at a lower price.
- Reduces the emotional burden of investing and trying to time the markets.
- Allows the investor to build a diversified portfolio over time whilst maintaining cash reserves in case unexpected things happen.
- For people with a regular income, it makes investing more predictable, and easier to stash money away before spending it.” – Cryptosaver guide to dollar cost averaging
A range of renowned investors such as Warren Buffett and Benjamin Graham recommend dollar cost averaging as a way to build up a position over time, reduce timing risk and sleep better at night.
Cryptosaver makes it easy to buy bitcoin in Australia and New Zealand through the dollar cost averaging method. Simply open an account, decide how much you want to invest each week, fortnight or month and set up an automatic payment that suits you.
Every week, we collect funds from a wide range of clients, then buy bitcoin in bulk. This way, we can pass on the bulk savings, providing the best price on the market with minimal effort and risk. Learn more here.