As we enter the second half of 2018 and debates continue to rage on between crypto bulls and bears, we thought it was a good time to step back for some perspective on the coin that started it all: bitcoin.
While the skeptics have been far more vocal this year considering the market downturn, experts and analysts from across the financial spectrum continue to weigh in with their diverse forecasts and opinions. But since nobody knows the future, the only thing we can do as traders is attempt to gain a holistic view of bitcoin’s current state, how we got here, and what could lie ahead.
While the perspective gained and resulting tactics may differ from trader to trader, we’ll walk you through that view below, including fundamental and macroeconomic considerations along with notable public commentary.
Where We Are
Are we on the cusp of a bull run? Is bitcoin dead? How long is the bear market going to last? If you find yourself asking – or fielding – those questions you’re not alone. Bitcoin has fallen about 70% from its peak at the end of 2017 when its ATH price flirted with $20,000. With that kind of extreme volatility keeping many investors at bay, there’s an important piece of very relevant context to consider: Bitcoin’s price crash is nothing new. Ask any true bitcoin early adopter – it’s “died” and “come back to life” many times. This is far from the first (or most severe) bear market.
This downturn simply feels more severe considering the sheer increase in volume of investors + funds invested, and the general tide with which the crypto market at large has followed BTC’s trend lines. We also didn’t have nearly as large and robust of an overall crypto market as we do today with heavy interest and activity from institutional investors and constant mainstream media coverage.
But what if this wasn’t a crash at all? University of Texas researchers John Griffin and Amin Shams suggest this is a very natural price decline. They argue that Tether, the stablecoin with a 1:1 peg to the USD, manipulated the price of bitcoin during the bull run of 2017. They further postulate this was done via Tether releasing unbacked tokens to buttress bitcoin prices, increasing selling pressure as Tether sold bitcoin in order to fully back their token at its alleged 1:1 ratio.
Other rumors have swirled in crypto circles of more explicit ‘whale collusion’ driving the Dec ’17 run – something regulated and traditional investment vehicles have fallen victim to as long as they've existed. While still up for debate, if it was manipulation this downturn may be less ‘crash’ and more jut a very natural and necessary correction.
By the Numbers
Now I could dive into bitcoin’s price charts and draw some lines, but there’s seemingly a new technical analysis on bitcoin every day. So instead let’s take a look at some fundamentals as ultimately bitcoin’s price – like any asset – is based on the market forces of supply and demand, and the underlying consumer psychology and circumstanes that drive those forces.
While the current crypto market may be a far cry from Satoshi Nakamoto’s original vision of bitcoin as a truly decentralized world currency and alternative to fiat, the safeguards built into its growth have stayed the course – and blockchain enthusiasts will tell you it’s a thing of beauty. Consider the snapshot below.
Deflationary by design, there’s a total max supply of 21MM bitcoins that will ever exist. With less than 4M bitcoins left to mine, many long-term investors have been eying the 2020 Bitcoin “Halving Event.” Occurring roughly every 4 years, this key element of bitcoin’s predictable and transparent nature cuts the amount of new bitcoin created and earned by miners with each new block of transactions in half.
The general consensus from investors is that these events have a positive impact on price or at the very least contribute to its healthy, deflationary growth. One alternative view suggests that without sustained price increases, miners operating at a loss would reduce their hash power potentially causing a ripple effect of reduced mining and demand – a very unlikely but plausible scenario.
Mining centralization and the potential for associated price manipulation is another common concern these days. However a recent breakdown by industry leader Jimmy Song walks through various mining centralization scenarios – across hashing power, mining pools, individuals, and hardware manufactures like Bitmain. Song’s overall and logical thesis is that the ability to manipulate prices is generally a non-factor across most possible outcomes.
Now of the 17MM bitcoins in circulation, there’s a notable consideration to make. Recent estimates peg the number of permanently lost bitcoins at upwards of 6 million. Crypto industry leader Jameson Lopp recently broke it down as 4MM simply lost forever and 2MM stolen. Suddenly, our eventual total supply of tradeable bitcoin becomes an actualized 17MM or less, meaning the supply side is essentially static – and if supply is static, an increase in demand is really all that’s necessary to drive bitcoin’s price higher.
On the other hand, several hundred thousand bitcoins (and bitcoin cash) totaling approximately $1B USD at current market value are about to re-enter the accessible supply. After being frozen by Japanese regulators upon the now infamous Mt. Gox hack that crashed the market in 2015, recovered bitcoins will be returned to investors, creditors, and hopefully victims. Details of the restitution plan are still emerging, but when complete, the influx could be telling. It wouldn’t be surprising to see a short-term price decline as many investors may be quick to sell and realize exponential gains in bitcoin’s price since the hack.
The Bulls Camp
Despite concerns regarding the current state of the market, the bulls have generally been consistent in their near-term view. One of the most popular, Tom Lee of Wall Street’s Fundstrat, was recently in the news again keeping to his original $25,000 in 2018 forecast. His prediction is based on a correlation of mining costs to trading prices and a belief that futures contracts are to blame for lagging bitcoin prices in the short term. Many have been quick to refute the latter however based on the low US futures volume relative to global bitcoin liquidity.
Another famous bull, Tim Draper, the venture capitalist that predicted bitcoin would surpass $10,000 back in 2014 has another bold longer term forecast of $100,000. Draper, whose VC firm recently led a funding round for the popular Ledger hardware wallet, points to trends such as growing integration with regulators and bitcoin’s utility as a store of value in otherwise volatile conditions. Take Venezuela, a country on the brink of economic collapse and the exponential inflation of the Venezuelan Bolivar. Today, Venezuelans are increasingly seen turning to bitcoin and altcoins as a means of storing value while avoiding the scrutiny of the state.
Llew Claasen, executive director of the Bitcoin Foundation, is yet another to publicly argue his case for the resurgence of bitcoin by year-end. Claasen’s main tenet is that as more ICO’s suffer from mismanaged priorities, outright fraud, and amateur management, money will naturally flow back into bitcoin as investors see it as a safer alternative.
The Bears Camp
While there may be some very vocal bulls, many public figures have remained bearish. Warren Buffett and Bill Gates, two of the most prolific names in investing and technology, have both advised investors to steer away from bitcoin and cryptocurrencies. Buffett has said he feels that bitcoin lacks intrinsic value while Gates has been against crypto’s anonymity in general.
Former chief economist at the International Monetary Fund and Harvard academic, Kenneth Rogoff, has also continued to disparage bitcoin as “fool’s gold.” His forecasts differ greatly from the like of Lee, Draper, and Claasen, predicting prices to nosedive as low as $100. His forecast is based on a belief that governments will not bend to the decentralizing and deregulating forces of bitcoin – which actually runs counter to most recent global crypto-friendly regulation updates.
Rogoff’s views are generally in line with another Berkshire Hathaway big wig, Vice Chairman Charlie Munger, who at their recent 2018 annual meeting criticized the currency as worthless artificial gold. Known for being traditional value investors, this type of negative commentary coming out of one of the world’s largest investment firms should be no surprise to bitcoin enthusiasts. Ironically in the US, where both pennies and nickels cost more to produce than they’re worth (1.5 cents and 8 cents respectively per 2016 data), it could be argued that fiat is the real fool’s gold.
Key Influences Moving Forward
While these bulls and bears will go on debating, there are several potential geopolitical and economic events that could drastically alter the course of bitcoin and crypto as we know it.
One such potential geopolitical catalyst for bitcoin is China’s economy. Economists around the world are beginning to sound the alarm about China’s rising debt to GDP ratio. Whether China can tackle its debt without falling into crisis depends largely on whether it can keep growing. While China maintains its ban on cryptocurrency trading in the mainland, most of the crypto markets have moved to Hong Kong. If China, the largest economy in the world by purchasing power parity, declines into an economic crisis, it could lead to massive fiat currency inflation. That in turn could push investors into bitcoin as a hedge against economic downturn or as an alternative store of value.
There have also been rumblings that India, another emerging economic powerhouse, may be changing its stance on crypto. Three months ago, the Reserve Bank of India announced that all RBI regulated entities must cease any crypto related activities - including both individuals and firms. However new information from a finance ministry panel assembled to study the issue indicates crypto-friendly regulations may be in the works – opening the floodgates in the country for investment in bitcoin and other crypto assets.
Global regulation at large has actually been a key factor in keeping institutional investments mostly on the sidelines. If industry estimates are correct, consider for a moment what a few hundred billion dollars entering the market with a static bitcoin supply could have on the current approx $100B bitcoin market cap. While many market participants have been averse to any level of regulation, the tide may be turning in the interest of luring that influx.
There’s also something to be said about general consumer protection. Minimizing price manipulation that could have led to the ’17 bull run and reducing market crashing hacks like Mt. Gox, are both key to building trust for a healthy and growing bitcoin market.
While the development of each of these scenarios may cause massive shifts in the crypto space, bitcoin is in a bit of a unique position. Some may lower short-term prospects for price driven by emotional selling, but none alter the original appeal of the now de facto standard in cryto nor Nakamoto’s vision and design for its long-term success.
While forecasting has always been a soft science with few succeeding in their predictions, there’s several indicators to keep an eye on. Expect continued volatility as developments around the world, particularly government regulation and macroeconomic conditions, continue to affect prices. As the gold standard for digital currency in security, simplicity, and as a store of value, investors would do well to consider the long-term horizon. Even if 2018 continues to be a bear market, the fundamentals of supply and demand – and associated risk - will continue to reign true for bitcoin like any other asset. In other words…DYOR;)