The story behind the rise in coin prices: the sorrow of speculators and the paradise of coin fans

Author's Note

This article is based on speculation and may contain errors and misrepresentations. Cryptocurrencies are still inherently volatile and their future development is unclear. Be prepared to lose money when investing in any cryptocurrency.

This article is only focused on Bitcoin, as this cryptocurrency is unrivaled in terms of history, liquidity, and popularity. However, the concepts described in this article are not only valid for Bitcoin, but also for the entire cryptocurrency community. This article is based on the popularization of Bitcoin or the completion of second-layer technology protocols (Lightning Network, sidechains, etc.). Although whether the above protocols can be passed remains to be discussed, it is beyond the scope of this article.

theory

In simple terms:

The development and adoption of Bitcoin and ultimately its price have followed an S-shaped technology acceptance curve, which is a repetitive, exponentially growing Gartner Hype Cycle.

This theory represents the long-term overall development trend of Bitcoin, which may be affected by other factors, such as exchange attacks, government regulatory measures, changes in economic policies, and other technical improvements in the protocol. These factors may trigger the transition of the hype cycle stage.

S-Shaped Technology Adoption Curve

As mentioned above, the analysis in this article is based on the premise that Bitcoin is fully popularized. So how does a technology go from zero to full popularity?
There is a well-known concept in marketing called the bell curve:

This parabola represents the popularity of a certain technology before it reaches moderate saturation, which is exponential growth. The logarithmic decreasing trend will not weaken until all potential people begin to adopt this technology. Currently, Bitcoin is still in the innovation stage (Innovator), at most it is an early trial stage (Early Adopter).

If you want to see the specific number of people using Bitcoin in each period from this bell curve, you can refer to the yellow curve in the figure below:

This graph is called an S-curve simply because its shape resembles the letter "S". The typical feature of this type of curve is that it grows slowly before achieving a "vertical rise" state (that is, when the vast majority of people adopt Bitcoin). From the development of the technology market in the last century, almost every best-selling technology follows this S-shaped transition before becoming popular, as shown in the figure below:

In addition, the more perfect the technology develops, the flatter the S curve will be, and the vertical growth of popularity will become more and more obvious.

So, if Bitcoin follows this S-curve, why is it so volatile? In the long term (a decade or more), the S-curve of technology adoption is relatively stable. However, in the short term, the volatility of adoption (especially when engaging with new customers) is very large. If Bitcoin follows a standard S-curve, then eventually once the cryptocurrency reaches full adoption and exponential growth, the current volatility will be normal. This is why long-term price predictions must rely on these charts.

The S curve will indeed be volatile for a period of time, but in the long run it is still exponential growth.

Bitcoin Bubble & Gartner Hype Cycle

No matter how long one studies Bitcoin, he will inevitably encounter the Bitcoin bubble phenomenon. First, the price of the currency will maintain a stable but slow growth for a long time, and then the price of the currency will suddenly soar at a rate of 5% to 10% per day until the price reaches a certain peak (the growth peak is about 1000%). In the currency circle, this phenomenon is called a "super bull run".

Since this bubble phenomenon still cannot escape the nature of speculation, it will eventually reach a "height of irrational prosperity". That is to say, when the number of sellers begins to exceed the number of buyers, this bubble phenomenon will end, and the price of the currency will fall, returning to the state before the bubble occurred; compared with the peak period, it has fallen several times. Usually many economists and news media will stand up and shout "Bitcoin is dead" at this time.

Then the price will continue to stabilize at a relatively low level. I call this period of time "boring low price". This period of time is the best time to buy Bitcoin. At this stage, any good news seems unable to drive the price of the currency up.

Eventually, the market begins to decide that the price has stabilized and that Bitcoin is a speculative investment. This triggers the transition to the next phase (which is the period we are currently in), which I call the "wave up period". During this period, the price of the currency rises in steps and is almost able to reach the latest high. When the price of the currency reaches between 80% and 90% of the highest point, the bubble cycle will start again and the bull market will start again.

The following chart is the best proof of the bubble phenomenon from November 2013 to now:

When studying the bubble phenomenon, another concept related to technology cannot be ignored: Gartner Hype Cycle. This concept perfectly explains Alma's Law:

We tend to overestimate the short-term effects of technology and ignore their long-term impact.

The Gartner Hype Curve is as follows:

Essentially, attitudes toward all new technologies follow the same pattern: first excitement about the potential applications, then the realization that most of those applications are unlikely to ever come to fruition, then research into truly effective use cases, and finally steady progress.

After careful comparison, I found that the technology development pattern from excitement, disappointment to cautious exploration in Gartner's hype curve is very similar to the Bitcoin bubble phenomenon.

Unlike a typical hype cycle, the Bitcoin bubble will not eventually reach a steady growth stage. As mentioned above, the Bitcoin bubble will continue to grow exponentially in an S-curve path. So why is the Bitcoin bubble related to the hype cycle? This is because Bitcoin investment itself is speculative. Speculation, to a large extent, is driven by hype.

To illustrate the relationship between Bitcoin hype and price, here is a chart showing the logarithmic scale of price and Google search index for Bitcoin:

As can be seen from this table, in the past, increases in Google searches for keywords such as “bitcoin” and “how to buy bitcoin” have been associated with short-term (weeks) increases in the price of the currency; presumably due to the need to purchase and manage Bitcoin during the learning curve.

Since the price of the currency rose too rapidly during the super bull market, speculators began to think that this phenomenon was unreasonable and unsustainable. Most people started buying coins in large quantities before or in the early stages of the super bull market, which affected their own liquidity and ultimately caused losses. Only after a long period of "boring low prices" and "volatile growth" will speculators think that the bull market price is reasonable. Once rationality becomes the bottom line for investors to understand Bitcoin, the hype cycle will once again trigger a super bull market.

Exponential Fractals

Fractals are an extremely fascinating branch of mathematics that use relatively simple mathematical formulas to produce infinitely complex patterns that repeat infinitely at different orders of magnitude. Fractal algorithms are often used for technical analysis in the foreign exchange market and high-frequency trading.

While I haven't seen any typical fractal formula that can be used to describe Bitcoin's price movements, I think there is a relevant fractal pattern. It exists in the form of exponential Bitcoin bubbles, driven by the Gartner hype curve. I think there are many doctoral dissertation topics on this topic.

The charts below detail the fractal patterns that have existed in Bitcoin bubbles, each with full orders of magnitude features far exceeding the previous one.

Comparison between the November 2013 bubble and the February 2013 bubble:

Comparison between the February 2013 bubble and the June 2011 bubble:

Comparison between the June 2011 bubble and the January 2011 bubble:

Comparison between the January 2011 bubble and the November 2010 bubble:

I think this pattern clearly shows the psychology of a large group of independent speculators, each of whom tried to act rationally when dealing with a fast-growing asset like Bitcoin. They chose Bitcoin in the beginning out of greed and fear, emotions that are fundamental to human nature. When the super bull market started due to hype tipping point, people went to Bitcoin with greed and fear of missing out (FOMO), and speculation was their main purpose. As more and more speculators boarded the Bitcoin ship, the cryptocurrency grew rapidly. In the end, the early speculators made a lot of money, but the fear of losing money finally overcame greed, so they chose to sell their Bitcoin. Therefore, the current price development is far from reaching the reasonable stage.

Then, the super bull market gradually ended and a new round of "crisis" began. People who bought the coins with a burning heart have begun to lose money, so they sell the coins to avoid further losses. These people are usually short-term speculators who are not interested in Bitcoin technology and only see Bitcoin as a springboard for earning legal currency. They usually have only "a small hand" because they choose to fold (sell coins) without hesitation every time they encounter difficulties; they are usually losers in the trading market. The "crisis" mentioned here usually refers to the elimination of this part of "pure speculators". Those who still hold Bitcoin after the "crisis" are long-term loyal holders, and the number (and quality) of such people will also increase after the next bull market.

After this storm, negative comments such as "Bitcoin is dead" or "Bitcoin is too volatile to be used as a means of preserving value" will take time to fade away. In the boring low-price stage, the price of the currency will remain stable due to the lack of speculation. The price of the currency has not risen, and people who have the currency are not willing to sell it at a low price, so no new speculators will appear during this period. This phenomenon will not change until speculators realize the stability of the currency price.

After a period of time, the price of the currency remains stable, and speculators cannot see the potential value. Several new big players will begin to study Bitcoin technology and buy a lot of coins, which will eventually cause a small bubble phenomenon and the price of the currency will begin to grow slowly. This stage is what I call the "volatile growth stage". The price of the currency first shows a step-by-step growth before entering the super bull market (the current range is about $100). Then the price of the currency begins to rise and fall, and the overall upward trend is until the 80% peak appears, and the super bull market is officially launched. The price that was unimaginable before really appeared, and it was quite stable. Then a new hype cycle began, and the emotions of greed and fear of missing out were rampant in the bull market again.

This is the cycle of the hype cycle. As far as I know, the Bitcoin hype cycle has been repeated 5 times. Because human nature cannot change, I think this cycle will repeat at least two or three times:

The last super bull market started when the S curve showed exponential growth; by then, most people would quickly accept Bitcoin and the S curve would also show vertical growth, but this would still take many years. When Bitcoin really dominates the market, all these transitions will be completed in an instant.

Summarize

Bitcoin is arguably the best example of a speculative nature being used to popularize something in human history. Its popularity pattern follows the technology development curve perfectly. The S-curve is made up of hype cycles that repeat in a fractal pattern. Each fractal repetition represents an order of magnitude that outperforms the previous one. As Bitcoin gradually moves closer to the development model of the US dollar, each bubble will cause lower price fluctuations than the previous one. It will take two or three hype cycles before Bitcoin goes mainstream.

Currently, all technical analysis suggests that we are only a few months away from a new hype cycle and super bull run. I predict that the price of Bitcoin may stay around $900 in a volatile rising phase before the super bull run starts.

It is difficult to predict the specific time and peak of the super bull market, but we can speculate a general time range. In 2013, I first analyzed this pattern, when the coin price was $70 and the highest price ever reached was $258. Using the known knowledge, I predicted that the super bull market would be around November 2013, with the highest coin price of $1,177. Later, I concluded from the analysis model that the price of Bitcoin might be $2,500 at the peak of the super bull market. Then I realized that it is stupid to price rashly during the booming period of a technology. Generally speaking, you can start selling when the coin price is about to reach its peak, and then wait until the crisis comes to slowly buy back; finally, hold the coin for a long time.

Once again, the above is purely personal speculation. Please read this article rationally to avoid unnecessary losses.