Bitcoin: Buy the Dip?

 Newsflash: Bitcoin (CRYPTO:BTC) prices are volatile and unpredictable! Film at 11.

Alright, that's not exactly news but Bitcoin's wild swings might present a buying opportunity right now. The leading cryptocurrency's tokens are changing hands for $43,800 today, more than 30% below April's all-time highs of $64,829 per token.

Is this the start of another painful plunge that will last f

or years, or is it a temporary dip where investors can build their Bitcoin holdings at a generous discount? Let's take a look.

Image source: Getty Images.

Who decides what Bitcoin is worth, anyway?

First things first: My time machine is in the shop and my crystal ball was just a cheap knock-off. Always in motion is the future and I can't claim to know for sure what will happen.

That's particularly true when we're talking about cryptocurrencies. You can argue that stocks have an intrinsic value based on the company's business results, price-to-earnings ratios, dividend growth models, and so on. Traditional currencies like the U.S dollar or the Japanese yen are backed by entire countries and their carefully crafted monetary policies. None of that applies to digital currencies, whose market value largely depends on trust and popularity.

A cryptocurrency that is held by a lot of people, companies, and organizations is more valuable than one that is rarely found in the wild. A thriving community of active users results in a useful currency that can pay for products and services, store value in the long term, or take advantage of built-in features like the smart contracts of Ethereum (CRYPTO:ETH) or the privacy-boosting attributes of the Basic Attention Token (CRYPTO:BAT).

Establishing trust is the way to build a large and active user base. If you build a secure store of value comparable to gold, they will come. If you build a reliable, low-cost transaction settlement system, they will come. In Bitcoin's case, the currency can be used to buy things but the transaction costs are relatively high, and the managing group's ultimate aim is to rival or outshine gold as a long-term store of value.

Difficult market action

Bitcoin's stable value idea was supported by strong price gains over the winter. Financial institutions started treating the largest cryptocurrency as a legitimate asset class, worthy of inclusion in their clients' financial portfolios. A handful of companies swapped out some of their cash reserves and low-yield bonds for Bitcoin tokens, led by business intelligence specialist MicroStrategy (NASDAQ:MSTR) and electric car giant Tesla (NASDAQ:TSLA). In short, Bitcoin started to look like a respectable investment.

That groundswell of public support faded this week. There are many secondary reasons behind this negative trend, but one market-moving figure towers over the rest. Tesla CEO Elon Musk had a change of heart, promising not to buy any more Bitcoin until he knows that the coins were mined using 100% renewable energy.

The environmental focus does make sense, given Musk's long-term goal of replacing the world's fossil fuels addiction with solar panels, wind towers, and other alternative energy sources. Musk's complaint, along with the implication that Tesla might sell its Bitcoin holdings, drove cryptocurrency prices sharply lower.

However, other crypto-friendly business leaders were quick to point out that Bitcoin's environmental impact may not be that bad.

Morgan Creek Capital Management co-founder Anthony Pompliano pointed out that 75% of Bitcoin miners rely on alternative energy already, leaving a small slice of damaging coal-based mining operations in the market.

MicroStrategy CEO Michael Saylor, who played a significant part in Musk's earlier cryptocurrency bullishness, noted that "the net impact on fossil fuel consumption over time will be negative, all things considered." Bitcoin transactions use almost no energy and the heavy-duty mining work supports the security of Bitcoin's blockchain network.

"When Elon realizes that bitcoin mining is actually pushing the renewable energy industry forward, he will refresh position and #bitcoin will moon," tweeted Gemini Trust co-founder Cameron Winklevoss.

Image source: Getty Images.

What comes next?

Elon Musk has an almost hypnotic control of the cryptocurrency market. One might think that he would use that power to increase the value of Tesla's Bitcoin holdings, but his actions had the opposite effect this week. The mercurial business genius may very well flip-flop again, unleashing another whipsaw sea change to Bitcoin and other digital currency prices.

This, too, shall pass. In the end, investors and business leaders must push their Musk obsession aside and decide whether they trust Bitcoin for its long-term purpose. Again, I don't have a reliable crystal ball, but I will say that the global economy could use a few borderless financial tools. As the original top dog in the digital currency field, Bitcoin has established itself as the most likely winner in the long run.

There are limits here but Bitcoin does look like a reasonable buy at these lower prices. Don't bet the farm, don't borrow money to trade Bitcoin on margin, and don't expect a smooth ride to the moon or the treetops. The ride will absolutely be bumpy and the whole idea may actually fail.

So feel free to dip your toes in the Bitcoin market today. Just be careful out there.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Another Voice: Bitcoin mining imperils N.Y.’s renewable energy goals

This April 3, 2013, file photo shows Bitcoin tokens. Bitcoin is a leading cryptocurrency.

Rick Bowmer

Dr. Larry Beahan

Cryptocurrency has crept into Western New York almost unnoticed. Digihost’s bid to buy North Tonawanda’s nearly defunct Fortistar, a methane- and oil-fueled power plant, presents an imminent threat to our carbon footprint.

In Buffalo on Delevan Avenue, in 70,000 square feet of the old Chevy axel plant, Vancouver-based Digihost mines tons of Bitcoins.

To quote one of Digihost’s internet blurbs, “Today, the company owns 11,800 miners with more being added all the time. We possess a total power capacity of 42 megawatts. This makes us among the largest miners in the business. We actually mine Bitcoin and other cryptocurrencies in one extremely low cost and low power consumption data center in Buffalo, NY.”

Bitcoin mining is an accounting system for Bitcoin transactions. Banks perform this function for conventional currency using time-honored accounting practices. Bitcoin-mining computers devise formulas that compile transactions into blocks of hashed information. Each new block is based on the previous one and the whole forms a chain. Miners compete to produce these formulas. Every 10 minutes a winner is awarded 6.25 Bitcoins. As of Friday, each Bitcoin was worth just over $50,000.

The complexity of the computation required, and the growing number of miners, requires amazing quantities of electricity. The world Bitcoin industry is estimated to be using as much energy as Argentina, twice that of Switzerland.