If the ETF resolution is officially passed, what impact will it have on the price of Bitcoin?

Been studying this Bitcoin price infographic today.

This chart shows several huge fluctuations in Bitcoin price in the form of basic trend lines, abstractly showing several large speculative activities.

The table contains a lot of information:

From late 2015 to May 2016, after the multi-level marketing incident drove Bitcoin's price through several eye-catching moves, three Cat-shaped and one Moon-shaped consolidation patterns appeared in six months.

As of early June 2016, we can see a speculative bubble (green in the image) as the market tries to price in the next block reward halving. This is the second halving, which significantly reduces spending and thus the supply of new bitcoins is halved from 25 to 12.5 every ten minutes.

Before this, many people were worried that miners would quit (taking away the protective hash power), that block processing would slow down, and that prices would collapse. In fact, none of this happened. The market only saw a slight reduction in selling pressure from miners because they mined fewer new coins. (The blue trend line shows that the market price appreciated faster under this event.)

Finally, the fourth quarter of 2016 shows that the market has been going through a large and long period of thinking, waiting for the next Bitcoin ETF decision (Exchange Traded Fund). If this proposal is passed, at least millions will be invested in Bitcoin. This can be seen in the extension of the blue shaded area in the figure.

If this is indeed the case, then this diagram is very useful.

Methodology

From this data, we can deduce the impact of a controlled reduction in Bitcoin supply on price, and also infer changes in the inflow of new funds.

The chart above tracks two price trajectories, depicting the impact of two monetary sparse policies on prices.

Every ten minutes, the blue line supplies 12.5 bitcoins and the green line supplies 25 bitcoins. The difference between the two trend lines at any point in time can show the impact of different supply on prices.

The difference between the two trend lines will let you see the effect of different supply levels on the "fair value" price. I think "fair value" holds during the actual bubble period, and from the new baseline we can see a period of carnival, and possibly a long consolidation of three cats and a moon.

First, a word of caution about the accuracy of this method.

As any chartist and trader can attest, the placement of trend lines is a work of art, so actual results can be wildly inaccurate.

Let's first see if the results make sense...

Results and Comments

Basic price

In the absence of any speculation on the day the ETF decision was announced, the basic baseline for Bitcoin price was $900.

Basic Return on Investment (ROI)

The trend line shows that the return on Bitcoin investment increased from 97% to 188% after the block halving, while monetary inflation dropped from 10% to 4%.

ETF price impact and market capitalization

Based on different capital injection scenarios, we predict the price will be between $1,090 (a $300 million capital injection) and $3,200 (a $2 billion panic investment). In comparison, gold ETF accounts account for 0.6% of the gold market value, while a single $300 million ETF inflow would account for 2% of Bitcoin's market value.

Current market speculation

Needham and Company released a report earlier this year predicting that the ETF proposal might pass at less than 25%. However, at the time of writing, the newly released BitMex ETF prediction market report shows a 33% chance. We have seen Bitcoin speculative prices range from $1,015 to $1,150, with ETF success rates ranging from 25% to 33%, which is consistent with the ETF investment range of $500 million to $1 billion.

What does this mean for price movement in March 2017?

The results will be announced on March 11th, and the market will fluctuate greatly due to speculative pricing*. Let's assume that the price of Bitcoin is $1,090 before the results are announced. If the proposal is passed, the price may rise by $380 to $570** instantly. On the contrary, it may fall by at least $190 to the $900 baseline. The specific situation will depend on the sentiment brought about by the ETF passing.

* Short-term prices will be driven by speculators, as the majority of actual ETF funds come from Bitcoin in the OTC market. This means it will take some time before the reduction in supply has an impact on the exchange market.

**There is a 25% chance that the price will be (900+190*4) USD, and if the chance is 33% then it will be (900+190*3) USD.

How do these results compare to other reports?

Needham Investment Bank

<25% chance of success

·$300 million will be injected into the market in the first week

Undetermined price target

Using a 25% chance of success pre-decision and a speculative price of $1,100, my model predicts a long-term capital injection of $1 billion and a base value target of $1,700. This prediction is roughly in the right range.

Seeking Alpha

35% success rate

Price target at $3,678

Probability adjusted price is $1645

If the probability is adjusted, then the actual price forecast is $1645 and my model infers a fair value price of $3125 (ETF funding is $2.2 billion).

Perhaps their target price takes into account the fact that excessive speculation could drive prices skyrocketing, so the two figures are roughly consistent with the forecast.

In this case, over-speculation could reach 18%. Seeking Alpha believes that the market will significantly underestimate the price of Bitcoin (67% according to the report).