The Tipping Point for Bitcoin Just Arrived

One of the most miserable bitcoin tales you'll ever hear... Don't be like this day-trading construction worker... The most interesting part about each bitcoin rally... A 'face melting' extreme... Two major factors for bitcoin's surge higher... The tipping point for bitcoin just arrived... This is when the true madness will begin...

Nearly every crypto trader can share stories of both success and misery...

The tales of success are always great to hear, of course. It's nice to find out when folks make life-changing gains with just a small allocation of their overall portfolios.

But the thing is, I (Eric Wade) believe we can learn the most from the tales of misery...

After all, to become better at anything in life – including investing – we must learn from mistakes... whether they're our own or those made by others. And as you'll see in today's Digest, it's imperative right now to remember one of the more miserable tales I've heard...

This tale of bitcoin misery comes from a friend who's a bit of a real estate mogul here in Los Angeles...

For the purpose of today's Digest, we'll call him Leonard.

Eight years ago, Leonard was cleaning out an apartment that he owned so he could relist it. He discovered some tools that the previous tenant left behind. The old tenant told Leonard that he could keep the tools, but he had no use for them... so he decided to sell them.

Leonard listed the tools for sale on Craigslist. They sat there for a few days... until a young man contacted Leonard with an interesting and unusual offer. This man didn't have any cash to buy the tools, but he had about $600 worth of "digital money" called bitcoin.

The young man wanted to know if Leonard would take $600 in bitcoin instead of cash.

Leonard hadn't heard of bitcoin... And truth be told, he wasn't interested in learning more about it. But the tools were taking up space and selling them would be essentially "free money" to him, so he agreed. He met the seller at the apartment to complete the deal.

That's when Leonard learned the buyer had quit his job a year earlier to "day trade" stocks and bitcoin. Apparently, though, he wasn't very good at it... The young man had burnt through all his savings. So now, down to his final 60 bitcoin, he decided to throw in the towel and buy a set of tools so he could go back to his previous career in construction.

They loaded up the tools and Leonard never saw the guy again. But here's the kicker...

At the time of the deal, the young man's 60 bitcoin traded for $10 each...

Within days, bitcoin's price began to rise... And it kept rising for the next six months.

By April 2013, each of Leonard's 60 bitcoin was worth $213.72. That meant Leonard was now sitting on more than $12,000 in bitcoin. Take a look...

Now, Leonard was used to making slow, steady gains as a real estate investor... So he was ecstatic at these massive short-term gains. His bitcoin investment turned $600 into more than $12,000 in just six months... And remember, it wasn't even his $600 to begin with.

Leonard became hooked on the possibilities of cryptos. He even started "mining" bitcoin... In other words, he started contributing computing power to the bitcoin network to help it operate in exchange for small payouts in bitcoin.

Meanwhile, somewhere across town, a construction worker was likely in the absolute depths of misery... He had sold his final stake in bitcoin just before the start of a 2,000% rally.

The rally was short-lived, though... In fact, bitcoin fell 70% in a week in late April 2013 to bottom at around $65. My friend Leonard experienced his first boom-bust cycle in bitcoin.

But Leonard is a lot like me – and truthfully, like most patient long-term investors...

He isn't the kind of person who throws in the towel at the first sign of trouble. He had discovered something that worked... And he planned to stick with it through thick and thin.

So Leonard kept mining and accumulating more bitcoin... And bitcoin kept experiencing incredible booms and busts over the next several years.

In fact, after bottoming at around $65 in April, bitcoin went on another rally later that year... Its price spiked to $1,132 in November – a gain of more than 1,600% in seven months.

Within a year, Leonard's 60 bitcoin had gone from about $600 in value to nearly $68,000. That's more than the annual salary for the average construction worker in Los Angeles.

Somewhere, that poor construction worker was probably beside himself. Not only had he given up on bitcoin before one rally... he had missed out on two incredible surges higher.

The most interesting part about this chart is how each new bitcoin rally makes the previous one look insignificant...

Bitcoin rallies are so extreme that many crypto traders describe them as "face melting."

To many outsiders, though, they look incomprehensible... They appear to be untethered from reality. I've heard them likened to "tulip mania" in the 17th century... Some truly manic behavior led the price of tulips to soar to unthinkable heights – until the bubble burst.

Bitcoin rocketed 2,000% higher in just a few months in Rally No. 1 in 2013. But as you can see from the previous price chart, that looks tiny compared to Rally No. 2 – when it jumped another 1,600%.

And then, when the 2017 face-melting rally arrived, it made all the previous rallies look like tiny blips. Take a look...

Again, these rallies might look incomprehensible to most outsiders to cryptos.

But to me, they look perfectly rational... That's because they can be traced back to two factors – bitcoin's monetary policy and its ever-increasing adoption across the globe.

Let me show you exactly what I mean...

We'll start with how bitcoin's monetary policy influences its price...

Regular Digest readers know all about the world's central banks loosening their monetary policies over the past 12 years. However, on the flip side, bitcoin has been tightening...

You see, roughly every four years, bitcoin's inflation rate – the amount of new bitcoin entering the world – is cut in half. (Its inflation rate is currently 1.79%.) The inflation rate will continue dropping every four years until 21 million bitcoin exist... At that time, the computer code running the bitcoin network will stop creating new bitcoin.

In the industry, we refer to these monetary updates as "halvings"... And they're literally coded into bitcoin's software. They happen automatically with no human intervention – regardless of what's going on in the economy or what's happening at the Federal Reserve.

With bitcoin nearing its 12th birthday, we've had three halvings so far – in November 2012, July 2016, and this past May. The net effect of a halving is that bitcoin becomes much harder to acquire. And it tends to lead to a major repricing for the world's biggest crypto.

It's easiest to see what I mean on a logarithmic chart. Since 2013, bitcoin has three distinct price ranges. Each is 10 times higher than the previous one. Take a look...

As the market adjusts to a new, more constricted supply, the price of bitcoin tends to rise. And I believe that's what we're witnessing right now... the start of the next major repricing. If past trends hold, we could be looking at bitcoin prices of $100,000 or more within a couple of years.

In fact, I've gone on the record to say that we'll see bitcoin hit $1 million in our lifetimes (which would be 50 times today's price of about $19,000). The range of $100,000 bitcoin is just the next logical step on the long-term journey toward turning my prediction into a reality.

That might sound crazy, but as I said, two major factors cause bitcoin's price appreciation – its monetary policy and increasing adoption. We just discussed the first part of the equation.

And now, I believe we've entered an entirely new era for bitcoin adoption...

Bitcoin is supposed to be convenient digital cash that you can send instantly to anyone else... anywhere in the world... with no restrictions. And it is that.

But ironically, a thick brick wall between the world of traditional banking and the world of bitcoin has always existed. For the first decade of bitcoin's life, banks and other financial-services companies wanted nothing to do with it.

In fact, back when I first became interested in bitcoin, the easiest way to acquire it was by doing exactly what my buddy Leonard did – mining it. So that's what I did, too...

I spent a couple of days learning how to turn my laptop into a "bitcoin miner." Then, every 10 minutes, I was rewarded with a tiny amount of bitcoin. Bitcoin was growing, however... and laptops were quickly replaced by specialized, high-powered computer processors.

About that time, companies sprung up that let you buy and sell bitcoin, too. But it was far from easy... You almost always had to send a money order or wire funds to someone in a faraway state – or more likely, in a different country. That also meant you needed to wait several days for your bitcoin to arrive (and hope that you weren't getting ripped off).

The only other option – one that I was never comfortable with – was meeting a stranger in a parking lot, watching him transfer some bitcoin to your digital wallet, and then handing him some cash. Yes, that was – and is – a real way to acquire bitcoin... Many people around the world still do it this way today. It's also the perfect setup to get mugged... or worse.

Now, more than a decade after bitcoin's creation, we've evolved...

We've reached a point where you can buy bitcoin with a debit card or a bank transfer on digital exchanges – including the well-known Coinbase. But it still isn't as easy as it should be...

In order to buy bitcoin on these digital exchanges, you have to set up an account and verify your identity. That means scanning or photographing your government-issued ID card... and sometimes a bank account statement or utility bill as well.

We simply can't reach mass adoption of bitcoin with that much friction involved.

That's why the recent big announcement from payments giant PayPal (PYPL) is so important...

On October 21, PayPal ended all the friction when the company announced support for bitcoin and three other cryptos – Ethereum, Litecoin, and Bitcoin Cash.

PayPal started by giving a small segment of its more than 300 million users the ability to buy and sell crypto. Then, on November 12, the company flipped the switch... Overnight, its 286 million U.S.-based users suddenly could buy and sell cryptos as easily as logging in to their PayPal accounts and clicking a handful of links.

I tested the system immediately. And it's really easy for anyone to do... I was able to buy bitcoin in about 90 seconds, and it took exactly nine clicks of my mouse (I counted).

While PayPal users can't currently withdraw or transfer their cryptos, those features will likely come soon. For now, PayPal has built the easiest way to buy bitcoin I've ever seen.

And with more mainstream acceptance through PayPal's new service, bitcoin went on a tear. As you can see in the following chart, it's up about 50% since last month's announcement...

Now, the question becomes – is the market overreacting to the news?

In the short term... possibly. Don't be surprised to see a pullback in the coming weeks.

But over the longer term, the market isn't overreacting to this latest news at all.

PayPal's adoption of crypto represents a tipping point for the industry.

The company has finally done what I've waited years to see... It has turned buying bitcoin from a confusing – and sometimes even dangerous – multiday process into one that's fast, convenient, and safe.

I've always maintained that bitcoin would never reach mass adoption so long as it was hard to buy. Now, it's simple. And bitcoin couldn't have a better partner than PayPal...

Its scale is massive. With more than 300 million customers in more than 200 markets. It processes nearly $2.5 billion in transactions every day. And it will soon give its 28 million merchants the ability to accept crypto payments online and in person.

PayPal is moving bitcoin from the fringes to the front lines...

More important, PayPal has validated bitcoin and blockchain technology as legitimate in the eyes of its critics.

A stampede of other fintech companies and eventually banks will likely follow PayPal's lead in the coming months and years. As PayPal President and CEO Dan Schulman said last month, "The shift to digital forms of currencies is inevitable."

He's right. The brick wall is crumbling. We see evidence of it everywhere...

In May, billionaire hedge-fund manager Paul Tudor Jones announced that he had invested about 2% of his assets in bitcoin... then later hinted that he had increased that number.

In June, the little-known Office of the Comptroller of the Currency ("OCC"), which supervises the country's banks, quietly released a letter saying it was fine for banks to custody crypto on behalf of their clients.

In September, business intelligence company MicroStrategy (MSTR) announced it was converting a large portion of its treasury into bitcoin as a hedge against inflation. It was the first public company in history to make that move. Payments company Square (SQ) quickly followed by announcing it was converting some of its Treasury to bitcoin, too.

That same month, crypto exchange Kraken.com announced that it had received a license to operate as a bank... making it the first digital-asset company in U.S. history to receive a federal bank charter. Kraken's domestic banking operations should start soon, and it plans to quickly expand internationally.

Institutions and smart money are as bullish on bitcoin as I've ever seen them.

Earlier this month, billionaire investor Stanley Druckenmiller said he's long bitcoin and believes it will outperform gold as we enter a multiyear decline for the U.S. dollar. His willingness to disclose his holdings added fuel to the spark lit by Jones in May, encouraging hedge-fund managers, endowments, and other big funds around the world to buy in, too.

The true madness will begin when bitcoin prices breach their all-time highs around $20,000...

As I said, I fully expect that we'll see a short-term sell-off when that happens.

But the key isn't getting spooked by bitcoin's volatility or even being transfixed by bitcoin's higher highs... The key is watching bitcoins higher lows.

In other words, is bitcoin's price floor still rising? It has been for the past 12 years... and I expect that to continue for years to come. Ultimately, we're going to see $1 million bitcoin.

The PayPal news marks the end of bitcoin's early years, and it issues in a new era...

We're now talking about the mass global adoption of digital currencies.

Don't expect the pace to slow down... It will only accelerate from here. And like the face-melting rallies of the past, the next rally will push bitcoin so high, so fast, that the previous rallies will seem to disappear when we look back at the charts.

Don't be like that poor construction worker. Be more like my friend Leonard... Buy bitcoin today and hold on for the long haul. One day, you'll look back and be glad you did.

By the way, I recently joined Porter to talk about our crypto-filled future during his 'Capitalism in Crisis' event...

Bitcoin grabs all the headlines – and it's great to see it getting more mainstream attention today. But the technology that powers the world's most popular crypto can potentially "reset" our financial system and disrupt all kinds of industries.

Smart investors who know where to look will have the chance to make crypto investments that result in life-changing gains. And in many cases, they can do it with just a small initial stake if they pick the right projects.

That's part of the reason Porter wanted me to take part in his recent event. And if you're not one of the thousands who have already tuned in, I urge you to do so right now...

The presentation is free to watch. I join Porter about halfway through via video to share my thoughts on how I see cryptos fitting into our world moving forward... and why I believe every investor should own a little bit of crypto in their portfolio. Get started right here.

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In today's mailbag, a question for Retirement Millionaire editor Dr. David "Doc" Eifrig. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"The post by Jerry P [in the October 23 Digest] is right on. Apparently my hubby and I have been really good neighbors (I have had two TIAs and lost a lot of memory) and now that the Corona got my hubby in May and he is no longer around, my neighbors have been an incredible help to me.

"Fortunately, my hubby had the foresight to choose a high enough survivor benefit amount that I can pay people to help me at home. I had no idea he had chosen the high option. This allows me to stay in my home.

"However, this experience also taught me that both spouses need to know the basics of keeping the books. I was in charge of investing (yes, I have done very well and doubled his Thrift Savings Plan since he retired seven years ago) but I am now lost with the day-to-day decisions of what statements I need to keep and what can be shredded. We get annual tax statements, don't we? Is that all I need?" – Paid-up subscriber Florence L.

Doc Eifrig comment: Florence, we're so sorry for your loss. We're glad you've been able to get the help you're needing, especially during this difficult time.

To your question, there are different types of tax statements you could receive each year – including W-2s, 1099s for capital gains, and 1098s for mortgage interest. In terms of what you need to keep, the IRS generally has a three-year window after your filing date to initiate an audit, so you want to keep these documents at least that long.

But you do need to keep some records longer. For any investment purchases, keep the transaction records for at least three years after you sell the investment. Similarly, keep the receipts and records for three years after you sell your home. And finally, keep records for any contributions you made to a nondeductible IRA (like a Roth IRA) for the life of the account plus three years. The reason is to prove you paid taxes before making withdrawals so you aren't double-taxed.

Losing a loved one is never easy, but there are hard questions folks can answer to make the event a little less difficult. In Retirement Millionaire, my research team and I created a guide to help you lay out a clear road map for your loved ones in regard to investing and finances. Subscribers can read it here. If you aren't already a subscriber, click here to get started today.

Good investing,

Eric Wade
Los Angeles, California
November 24, 2020