Bitcoin Just Collapsed. Should You Buy?

Bitcoin has fallen $2,000 in two weeks.

Bulls are freaking out.

Should you be a buyer here?

The price of Bitcoin topped off at almost $5,000 at the beginning of this month. But after rumors began to swirl about a Chinese plan to ban cryptocurrencies, BTC prices started to slip.

Then JP Morgan CEO Jamie Dimon came out and called Bitcoin a “fraud” in an interview, saying he’d fire any trader for trading the cryptocurrency “for being stupid.”

That did it.

Bitcoin prices plummeted following Dimon’s comments and haven’t begun to really recover yet. The price of BTC is down almost 40% in just two weeks and was trading this morning under $3,000.

The drop in prices has left Bitcoin bugs shaking in their boots, despite what they might tell you. This fear is evident in their extreme defense of BTC on Twitter and other social websites. Fact is, if Bitcoin fanboys were so confident about their investment, they wouldn’t be trying so desperately to convince you of what a great product it is.

Bitcoin bugs are buying on emotion. They’re in “puppy love” with BTC. And their love blinds them to reality.

But hold on, let’s not act holier than thou. I was in puppy love when I was 20 years old. I’m sure you were, too. And you remember it…

You meet a woman (or a man, or a non-binary individual, or a computer, or a rock, or whatever you’re into) and you think you’ve fallen in love with her. You can see she’s smart, talented, attractive, wealthy, and popular. But you’re only in love with those good qualities.

Truth is, you’re in love with this woman because you simply don’t have all the facts or are choosing to ignore them. All of human history would tell you people can be deceitful, short-tempered, cold, vain, crass, and over-emotional. Yet you’re blinded by all her good qualities.

Falling in love with Bitcoin is the same thing. Bitcoin fanboys are only focused on the cryptocurrency’s good qualities: It’s decentralized and anonymous, has a limited supply, and offers opportunity for profit.

But they’re not looking at Bitcoin’s disadvantages: There are unknown technical flaws, built in deflation, lack of proper security, and risk of more future government regulations. Bitcoin isn’t even that widely accepted yet.

My point is, most Bitcoin buyers are going in wearing blinders. And that’s a dangerous position to be in.

Now, don’t get me wrong here. I want Bitcoin to win. I support decentralized currency. But I’m not going to ignore the risks.

So what’s Bitcoin really worth?

That’s a difficult question to answer. But let me make an attempt…

Let us consider Adam Smith’s “natural price.” Smith says:

When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price.

In short, a product’s “natural price” is all of the costs associated with bringing it to market, plus “profits of the stock” for the owner.

According to most estimates, it costs about $1,000 to bring one BTC to market.

But let’s err on the high side and add a 50% premium.

So let’s say it costs about $1,500 to bring one BTC to market. And although Smith does not really give us a good guideline for what exactly an appropriate “profit” is, let’s assume a 100% profit. That would put the “natural price” of Bitcoin at about $3,000. (Remember, I erred on the high side.)

And right now, that’s what I think is a fair value for BTC: About $3,000.

So, should you be a buyer?

Well if you haven’t already been trading cryptocurrencies, I’d say no. It’s way more of a pain in the ass to set up a Bitcoin wallet than to open a stock trading account.

If you’ve been trading cryptocurrencies, I’d still say no. Personally, I’m not ready to be a buyer just yet. The price of Bitcoin has fallen about 30% in a week. I don’t feel safe stepping in front of that train. I mean, just consider that the great stock market crash of 1929 started with a 25% drop in equities in four days.

Still, I think there are bigger opportunities in cryptocurrencies to be had.

You see, Bitcoin needs to be digitally created. Bitcoin is created when it is electronically earned (or “mined”) using specialized hardware, generally called “miners.” Among the most popular digital currency miners on the market today is Bitmain’s Antminer S9, shown below.

This hardware solves highly complex mathematical calculations to confirm previous Bitcoin transactions. As a reward for this service, the owner of the mining hardware earns a transaction fee in the form of new Bitcoin. This is essentially how new Bitcoin is created.

These devices are the “printing presses” of the digital currency revolution. But a single one of these units doesn’t create very much Bitcoin.

People need dozens, even hundreds to thousands of these things running 24/7 to earn any real money. As a result, there are warehouses filled with nothing but Bitcoin miners.

All this mining hardware is the “picks and shovels” of the Bitcoin rush. But there’s one problem: There are no publicly traded companies that focus specifically on producing Bitcoin mining hardware. We simply can’t invest in them.

But if we look a little deeper, we might find what we’re looking for…

You see, the most important feature of the mining hardware is the semiconductor chips inside.

Bitcoin miners use what are called application-specific integrated circuit (ASIC) chips. These chips are absolutely vital to the mining hardware. They are essentially the brains of the whole operation.

ASIC chip manufacturers currently include firms like Analog Devices, Inc. (NASDAQ: ADI), Maxim Integrated Products, Inc. (NASDAQ: MXIM), and Qualcomm Inc. (NASDAQ: QCOM).

But I’ve found one company that produces nearly 80% of all the ASIC chips that are going into these miners.

Now, here’s the best part…

It doesn’t matter whether the price of Bitcoin or other digital currencies goes up or down; the system will always need these ASIC chips. So the companies that create these special chips are in a great position.

Bitcoin and cryptocurrency miners are creating money. And owning ASIC chip manufacturers is akin to owning the most important part of the digital “printing presses.”

I need to wrap it up for today. But if you’re interested in learning more about this ASIC chip stock, just click here.

Until next time,

Luke Burgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.