Bitcoin will serve as a guardrail against fiat currency devaluation in emerging markets in 2017

The author of this article, Vinny Lingham, is the CEO and co-founder of blockchain identity management platform Civic. He has accurately predicted the trend of Bitcoin many times.

I wrote an article in April called "The Awakening of Bitcoin". Since then, the price of Bitcoin has risen from $400 to the recent $1,000, the first time Bitcoin has reached this high since 2013, which is consistent with my previous article prediction, more specifically, I predicted that the market value of Bitcoin would reach $15 billion this year. Today (this article is published on the 28th) the price of Bitcoin is $934, the market value has exceeded $15 billion, my original prediction was $1,000, and the number of circulating coins is slightly less. My article is here.

Disclaimer:

Before I discuss my thoughts on 2017, I want to make a few things clear.

In early December I tweeted something like this:

“It’s unclear how long Bitcoin will linger around $700 to clear the floating chips, but I highly doubt we’ll see a flash of $800. — @VinnyLingham”

Overall, Bitcoin’s price stayed around $800 for less than 48 hours, and stayed in the $700 region for weeks. The tweet got a lot of comments, and I got some flattery, such as this one: “The Bitcoin angel has spoken! - @westcoastbill”.

I was also given the nickname "Bitcoin God!" which made me feel flattered. I think it is necessary to make two things clear first.

First of all, I don’t have a magic crystal ball. Everything I say has a probability of happening or not - we live in a world of probability. The reason I make a prediction is because I think it is very likely to happen, but it is not always certain to happen.

Secondly, I am a macro-analysis person and I don't pay attention to daily trading charts (I don't have the time), but even if I am not actively involved in trading, I am still very aware of things like leverage, drawdown volume and liquidity in the market. I don't do technical analysis because in my opinion macro factors will change the whole situation and disrupt the entire chart. The best use of charts is to look back at the past, not to look forward to the future.

Most of my predictions are based on my work experience, which includes capital flows, supply and demand, as well as economic, psychological, monetary, business, game theory and other aspects of my experience - like life experience and my own different lives in South Africa and the United States (capital controls, hyperinflation that caused the collapse of Zimbabwe's fiat currency, high interest rate environment, etc.). If you read my previous articles, you will find that the predictions I made based on these fundamentals are actually what happened later. This is not magic or a crystal ball, it is just the result of my analysis of information and data from multiple independent sources. However, sometimes I make mistakes.

The price surge in late 2016:

There are two main reasons for the incredible performance of Bitcoin prices over the past few months. The first is macroeconomic factors - the scrapping of large-denomination fiat currencies in India and Venezuela, geopolitical concerns about the election of Trump as president and its impact around the world, and most importantly, the most misunderstood and not often mentioned, the recent interest rate hikes by the Federal Reserve have put pressure on emerging market currencies, strengthened the dollar, and pushed Bitcoin prices up against foreign exchange. This in turn has created a demand for buying Bitcoin abroad as a foreign exchange hedge, especially outside the United States, where Bitcoin prices have soared even faster.

The second factor is that after breaking through the $800 mark, there was very little supply (translator's note: floating chips) between $800 and $900 (there were not many sellers, for many reasons that are beyond the scope of this article). This triggered an effective short squeeze, and the price quickly exceeded $900. However, before the price attacks four digits, it is likely to have a short consolidation period around $900, and may form one or two highs above $900, and then return to $800-$900 to find support, which is the price area of ​​the previous gap. Bitcoin prices may also be affected by the year-end profit realization around December 31, but I don't think the fluctuations will exceed this range.

Rising US interest rates drive Bitcoin prices higher:

As I mentioned above, most people don't understand the impact of the Fed's interest rate hikes on Bitcoin. This topic would require a long explanation, so I'll give a simple explanation here. Essentially, the higher the interest rates, the greater the demand for Bitcoin. You may disagree with this, but for historical reasons, gold is often used as a store of value when an economy collapses (usually a period of low interest rates, followed by inflation).

Gold is still overvalued right now, especially if the Fed keeps raising interest rates (which I expect to happen), as there is no inflation in the US due to QE. Bitcoin will rise in price when interest rates rise, because unlike gold, Bitcoin has a higher capitalized value, so the need to convert it into a yield-producing asset is reduced.

When the Fed raises interest rates, the currencies of emerging market economies will depreciate, which will cause the price of Bitcoin in this region to rise, and their Bitcoin will gain more equity value, which will further drive the demand for Bitcoin. This is because the cost of Bitcoin minting is different in different countries (factors such as electricity prices), and Bitcoin is a globally freely traded commodity (unlike gold, the cost of Bitcoin has little to do with labor input costs). If your country's legal currency depreciates, the cost of mining or buying a Bitcoin will increase. This market does not care about the performance of your country's legal currency.

Some would argue that Bitcoin, like gold, does not produce yields, and therefore, like gold, it will also suffer price pressures when interest rates rise, but there is a fact that the current market value of Bitcoin is only a fraction of that of gold, and for now, the expectation of capital appreciation of Bitcoin greatly reduces the requirement for a temporary yield curve. This may change in the future.

Under the monetary policy of the Federal Reserve, countries around the world have adopted historically low interest rates (even negative interest rates) and enjoyed an eight-year binge on dollar-based assets, stocks and debt. When interest rates rise, entities (governments or companies) must make interest payments in dollars, and they have to sell their own currencies to do this, which further weakens their own currencies, which even regularly closes short dollar positions. Carry trade positions are no longer profitable because dollars cost more - it's a vicious cycle. The result is that rising interest rates depreciate foreign currencies and strengthen the dollar.

This is more evident in countries where entities earn profits in their local currency but have debts that need to be paid in USD and do not have sufficient earnings in USD. Bitcoin will likely be traded against local currencies, making it more popular and demand will grow, as the rising price of Bitcoin in local currency creates more demand for Bitcoin.

There is no doubt that the price of Bitcoin will continue to rise next year, and I predict that it will reach $3,000 before the end of next year, just as I predicted before.

I think the last high of $1255 in 2013 was an "irrational exuberance" like the dot-com bubble, so I predict that there won't be another bubble like this, but I could be wrong. The technology world eventually surpasses this "bubble" peak once it matures, and the Internet even went higher after 2000 and stayed there. It's been three years since Bitcoin's last high, and a lot has changed.

I will write a post explaining in detail the topics I mentioned above, but, for now, I will summarize my predictions for the coming year.

What might happen to Bitcoin in 2017:

1. Reasonably low volatility (for Bitcoin), maybe a few dips but overall a steady rise.

2. Broader industry use cases and Bitcoin applications emerge. My company, Civic, is an identity management platform based on the blockchain, and I am very optimistic about the prospect of using a public ledger for identity management (we do not store private information on the blockchain).

3. It is likely that government-sponsored or -backed Bitcoin-related companies will emerge, with the government taking the lead in purchasing Bitcoin or investing in Bitcoin mining companies or similar companies.

4. Certain countries sanction Bitcoin for capital controls and exchange controls, which drives up the price of Bitcoin on the black market in those economies.

5. I predict that the Bitcoin USD/BTC exchange rate will increase 2-3 times in 2017. This will cause Bitcoin's exchange rate to increase 4-7 times against other currencies, but we should use the USD/BTC exchange rate as a benchmark.

6. Segregated Witness will be activated to solve the scaling problem.

Things that are unlikely to happen to Bitcoin in 2017:

1. Parabolic rise (Bitcoin price of $10,000 may not happen in 2017).

2. Hard Fork: We all saw what happened to Ethereum, so I would put the probability of a hard fork at only 5%.

3. Consumer adoption: This will still lag behind, and I don’t think Bitcoin will ever become popular as a currency for regular consumers. I still think of Bitcoin as a commodity, not a currency. But this will change over time.