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For many people, it is a difficult question as to where the price of Bitcoin will go next. Who knows? But here are eight factors worth considering.
A Fortune story about Bitcoin began circulating on Friday, in which Fortune and Data Sheet senior writer Aaron Pressman wrote that he tripled his own Bitcoin investment, only to lose half of it.
It’s a cautionary tale for both cautious long-term cryptocurrency investors and day traders prone to spending their money in very foolish ways. “Where will the price of Bitcoin go next?” isn’t an empty curiosity; it’s a difficult question.
The following tweet is from a very early adopter who is aging with pain and humor because the pain can only be seen in hindsight. It was a tweet from 2011. So he was an absolute lunatic who put in a dime for an obvious internet scam. If you ask the GOAT investing titans Mr. Buffett and Mr. Munger, well, Bitcoin still is to them. But in hindsight, he wasn’t actually crazy enough:
Missing out on opportunities like this is scary, and if you really want to back off despite being in the right place at the right time (being one of the lucky few who knew what Bitcoin was in 2011), remember that the last time Bitcoin was this hot, some people even mortgaged their houses in December 2017 to get loans to buy BTC. Mortgage your home to buy Bitcoin at a record price is a bold move. To quote Joseph Borg, president of the North American Securities Administrators Association, in an interview with CNBC at the time:
“We’ve seen people taking out mortgages to buy Bitcoin, or using credit cards, stocks, etc. He’s not a $100,000-a-year guy, he’s got a mortgage to pay, and he’s got two kids in college.”
So how do we chart a path between these two extremes to achieve profit instead of loss?
There are no simple answers. So in a phenomenon as profoundly new, incredibly complex, and rapidly evolving as Bitcoin, if you are too sure about anything, run.
However, below is a high-level overview of some of the biggest strengths, weaknesses, opportunities and threats that the market assesses in order to price in today’s trading point.
Bearish: Four major headwinds for Bitcoin
1. Concerns about overbought conditions caused holders and traders to take profits.
Sellers can be forgiven for taking profits or avoiding risks in the market. Compared with the previous record high in December 2017, the price of Bitcoin has doubled in less than a month. This is also based on a continuous surge in the past three months. The price chart of Bitcoin has shown a parabolic shape from the $10,000 mark in September last year to the second return to $20,000 in December.
This is the first time that a bitcoin has reached such a high par value in the market since "Rockstar" hit No. 1 on the Billboards. As the most crowded trade last month, bitcoin longs are easily severely overbought at the moment. In January, bitcoin was more popular among hedge fund managers than FAANGMT stocks.
Note: FAANGMT refers to Facebook, Apple, Amazon, Netflix, Google, Microsoft, and Tesla.
2. Double-spending panic drives risk-averse trading <br />Amid overheated price concerns this week, rumors circulated that a mining pool had double-spent $21. The rumor began on Wednesday when BitMEX Research discovered an RBF transaction on the chain. RBF transactions are a normal part of the blockchain, though. In fact, they are an intentional feature of Bitcoin's architecture. It allows a private key holder to resend a transaction that has not yet been confirmed but has a higher mining fee. This allows the sender to trick miners into verifying and confirming the order and adding it to the blockchain, which would likely not be verified in time if the original fee was too low.
Gaurav Agarwal, an open source cloud architect in San Francisco, said that developers proposed RBF in BIP125. They implemented it in Bitcoin Core 0.12.0 in 2016.
Unfortunately, a hint of a double spend became a viral rumor, sending the price of Bitcoin tumbling on Thursday. The total market cap fell by about $81 billion due to the ensuing FUD. This is because Bitcoin is specifically designed to prevent double spends without a trusted third party, using rules and incentives. The speed and scale of the capital losses reveal just how many new entrants there are to the market. There was a lot of froth in the price of Bitcoin Thursday morning, and it only took a rumor to get it going.
3. A threatening regulatory environment <br />Regulatory uncertainty for cryptocurrencies is coming as the U.S. transitions to a Biden administration. The Trump administration was largely silent on the fintech industry until 2019, openly hostile to Bitcoin and cryptocurrencies. Then in July of that year, the president broke his silence on crypto, saying he was "not a fan." Trump also mentioned Bitcoin and Facebook's Libra, linking them to illegal activities such as illegal drug trafficking.
President Biden nominated Janet Yellen to head the U.S. Treasury in November. The former Federal Reserve chair has been a critic of open-source finance. When Yellen repeated the Trump administration's line on cryptocurrencies at her Senate confirmation hearing this week, industry concerns about regulation grew. But she softened her stance in a written addendum to her answers a few hours later.
Meanwhile, Biden has ordered a regulatory freeze on all new proposals until his administration has a chance to review them. That includes a proposal by Yellen’s predecessor at the Treasury Department to regulate self-hosted crypto wallets. Bitcoin users are waiting to see what Biden will do, and markets hate uncertainty.
4. Bitcoin safe haven/non-correlation questioned <br />Perhaps the biggest bearish factor facing Bitcoin prices right now is the still unresolved question of correlation. Is Bitcoin a correlated asset that rises and falls with other securities such as stocks, bonds, commodities, etc.? Or is it a non-correlated asset and therefore a valuable hedge that can diversify a portfolio? This is the role that gold plays in fund managers' portfolios as a hedge against inflation and stock market losses. For most of 2019, Bitcoin's market movements were uncorrelated with other asset classes. There was no direct correlation or inverse correlation. But during the global asset valuation collapse in March last year, Bitcoin fell sharply like everything else. This dealt a major blow to the non-correlation thesis, and the question remains to this day.
Bullish: Four Big Tailwinds for Bitcoin
1. A tsunami of institutional investment in the past two quarters "Grayscale's assets under management soared as Wall Street made it synonymous with investing in Bitcoin. The New York-based investment company started last year with $2 billion in assets, and at the end of the year its assets exceeded $20.2 billion. The company said in a quarterly report on Thursday that the 900% growth was driven by demand from institutional investors such as hedge funds, endowments and pension funds." - CNBC, January 14, 2021 Despite the adversity facing Bitcoin, hedge funds are still pouring money into the market. In the never-ending pursuit of yield, managers have had to look beyond stocks and bonds as the year has passed in the blink of an eye. The Nasdaq Composite Index melted up, ending its weekly high in a year, and at this entry point, any hope of an excellent return on investment has been ruled out.
Business multiples (the relationship between stock prices and relevant fundamentals such as earnings) are at historical extremes. The price of the stock is jaw-dropping, and the current price is higher than Buffett has paid for the past 10 years. The stock price is too rich, and it also makes him, who loves bargaining, excited. Tesla's price-to-earnings ratio has now soared to a staggering 1,618.
That's because of the constant growth that investors like TSLA bull Chamath Palihapitiya expect. But remember, "the average P/E ratio for the S&P 500 has historically been between 13 and 15," according to Investopedia. This new valuation model is so completely decoupled from business fundamentals that a Zacks commentator on Yahoo Finance asked this week if P/E ratios even matter anymore?
Meanwhile, even as bond yields got a boost from Biden’s election victory, they were only just waking up from their abysmal all-time lows for much of 2020. And as Otavio Costa of Crescat Capital noted, the five-year inflation-adjusted real yield on fixed-income securities is approaching all-time lows.
2. Star-studded celebrities are joining Satoshi Nakamoto's world <br />At the same time, retail investors are more interested in Bitcoin and the cryptocurrency industry than ever before. Currently, the number of searches for "Bitcoin" on Google is about 10 times that of September 2020. Additionally, a wave of celebrity endorsements is driving awareness of Bitcoin and cryptocurrencies to fans around the world. Scaled social media channels are amplifying their signals, accelerating adoption in a way that would have been impossible a few years ago. For example, last May, JK Rowling asked someone to explain Bitcoin to her and it caused a huge stir. Elon Musk, among other Bitcoin and crypto enthusiasts, responded.
Just this week, Justin Roiland, the creator of Rick and Morty, combined art and finance to stunning effect when he successfully auctioned off his artwork for a total of 1,300 ETH, with a market value of approximately $1.6 million. Rowland’s arrival comes after Paris Hilton auctioned a cat painting for more than $16,000 worth of ETH in August. That same month, Ashton Kutcher also joined the ranks of Ethereum art auctions. Earlier this month, Lindsay Lohan, of “Mean Girls” and “The Parent Trap” fame, predicted that the price of Bitcoin would reach $100,000.
This doesn't sound strange. Back in 2011, Lohan tweeted, "If the Fed keeps printing money, (the dollar) will soon be worthless!" In addition, last November, Maisie Williams, who plays Arya Stark in HBO's "Game of Thrones," asked her fans on Twitter if they should "go long Bitcoin"? Last month, Carolina Panthers' Russell Okung also said that he is now the first NFL player to be paid in Bitcoin by the league.
A year ago, he wrote on Twitter: "Pay me in Bitcoin."
3. Fed monetary expansion in 2020 <br />As Buffett said in a February 2016 CNBC interview about interest rates: "Interest rates are like gravity in valuation. If interest rates are zero, then value can be almost infinite. If interest rates are extremely high, then it's a huge gravitational pull on value. We had this situation in the early 1980s...Berkshire Hathaway owns billions of dollars of one of our insurance companies in Europe, and they will bear negative interest rates."
Buffett added with his characteristic sense of humor: "If only we had a big mattress in Europe and could stuff all this stuff into it. If only I could find someone I trusted to sleep on it!" This is why it is difficult for Bitcoin investors to understand the Oracle of Omaha’s extreme disdain for Bitcoin and cryptocurrencies. The vast majority agree with his understanding of the role that interest rates and money supply play in valuation. This fundamental macro focus on seeking refuge from central bank currency debasement is perhaps Bitcoin’s biggest selling point.
Assets denominated in central bank currencies are inflationary by design. Bitcoin, with its limited supply and fixed issuance rate that halves every four years, is strongly deflationary by design. No wonder last year’s unprecedented monetary expansion to combat deflation has seen Bitcoin reach double the value of 2017.
4. Strong fundamentals: Bitcoin hash rate and new addresses <br />At the height of the Bitcoin bubble in 2017, Peter Boockvar, chief investment officer of Bleakley Advisory Group, called Bitcoin a "huge price chase without any basis." That Bitcoin is "without any basis" is a common refrain among cryptocurrency critics. But that is not the case with Bitcoin.
It is built on the enormous pain and expense of approximately 10,000 full nodes around the world that are used to protect, maintain, and update a fully transparent public ledger. Bitcoin is software as a service that is fast, accurate, and low-cost and available to anyone with a computer and internet access.
That’s the business model, and the fundamentals reveal a lot about how Bitcoin will perform in January 2021. Not relative to other asset classes or the global macro-financial outlook, but relative to a microeconomic perspective, the businesses and people who demand and provide its services.
Even though Bitcoin’s price fell by about 16% from January 8 to January 12, its fundamentals are stronger than ever. Bitcoin’s mining difficulty reveals that the global computing power required to maintain Bitcoin during the Bitcoin crash has reached record levels.
Amid the panic this week, the rapid mining of Bitcoin (maintaining accounts for its users) continues to accelerate. On the demand side, Glassnode data shows that on January 8, the number of active addresses on the blockchain has risen to a record high. According to data collected by CryptoCompare, by January 11, the volume of Bitcoin transactions on exchanges also exceeded the previous historical high. (Mengyan Finance) |
