How Bitcoin Pointed Me To My Latest Trade
You may have seen it in the news lately… The price of the cryptocurrency bitcoin is skyrocketing.
Part of the reason is due to an increasing appetite from investors and speculators. But there is more to the story.
For example, back in October, PayPal Holdings Inc. (Nasdaq: PYPL) announced that it will allow customers to buy cryptocurrency through their accounts and use cryptocurrency for merchant payments.
I recently recommended a trade in the digital payments provider, but first I want to look at cryptocurrency so you can understand why this is significant.
Why This Matters
Initially, PayPal users will be able to buy Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. This potentially opens the crypto markets to more users. It also makes crypto readily usable for transactions.
The two problems, a lack of access and usefulness in transactions, have been limits to the widespread acceptance of cryptocurrencies.
“PayPal customers will be able to use their cryptocurrency holdings as a funding source to pay at PayPal’s 26 million merchants around the globe.
Consumers will be able to instantly convert their selected cryptocurrency balance to fiat currency, with certainty of value and no incremental fees.
PayPal merchants will have no additional integrations or fees, as all transactions will be settled with fiat currency at their current PayPal rates.
In effect, cryptocurrency simply becomes another funding source inside the PayPal digital wallet, adding enhanced utility to cryptocurrency holders, while addressing previous concerns surrounding volatility, cost and speed of cryptocurrency-based transactions.”
Before the end of 2021, PayPal intends to add this option to its Venmo platform and to some international markets.
In addition to making crypto accessible and useful, PYPL is taking steps to make some investors more comfortable with the markets by working with a regulator.
“PayPal has also been granted a first-of-its-kind conditional Bitlicense by the New York State Department of Financial Services (NYDFS).
NYDFS’ approval … follows our June 2020 announcement for a new framework for a conditional Bitlicense to encourage, promote, and assist interested institutions to have a well-regulated way to access the New York virtual currency marketplace in a way that is both timely and protective of New York consumers, through partnerships with New York authorized virtual currency firms,” said Linda A. Lacewell, superintendent, NYDFS.
PayPal Chief Executive Dan Schulman said in the release that PayPal is “eager to work with central banks and regulators around the world to offer our support, and to meaningfully contribute to shaping the role that digital currencies will play in the future of global finance and commerce.”
This changes the perception of crypto for some potential investors who will see the market as increasingly credible.
This won’t make it any easier to determine the value of crypto markets. It is possible to argue that cryptocurrencies do have a value.
If we assume the asset class is viable for the long run, it could be valued as a store of wealth.
Credit Suisse estimated that, in mid-2019, there was about $360 trillion of wealth in the world. Now we need to estimate a portfolio allocation for crypto assets.
One model suggests 0.25% is a reasonable estimate. That implies a $900 billion valuation of the crypto markets. That’s probably low since wealth most likely increased this year. Rounding to an even $1 trillion, the market could be considered undervalued with a current market cap of $720 billion.
Bitcoin makes up about 70% of the market and could be undervalued by about 38%.
Of course, as you noticed, I made a number of assumptions to reach that conclusion. I’m not saying this is the precise value of bitcoin, but it is a possible valuation model and is as logical as any valuation model used for the stock market.
How I’m Trading This
Because there are so many assumptions built into valuation models, I prefer to use timing models. My Income Trader Volatility (ITV) model is useful and recently signaled a buy in bitcoin.
Now, I recognize the fact that a lot of our readers may not have an interest in bitcoin. Not yet, anyway.
But this brings us back to PayPal. These developments also support a trade in PYPL. And lucky for us, it also happens to be on an ITV “buy” signal.
The chart shows there is important support at $200, the dashed line in the chart. It’s likely that buyers will enter the market near this level.
Action To Take
Bullish investors could simply buy shares of PYPL. However, I prefer selling a put option with a strike price near this support lebel in order to limit the risk of this trade.
Either way, in the long run, the company’s embrace of crypto is a positive for PYPL. And this is true regardless of whether or not cryptos rise or fall. Within a few months, as consumers start holding crypto in their accounts, we will be able to model exactly how valuable this decision is.
For now, my focus is on the short term. From that perspective, overall, PYPL represents a low-risk, short-term trading opportunity.
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