I get questions about Bitcoin and crypto almost every day from investors in First Block Capital or from investors in one of our crypto products. The main question is always my view on price, why did Bitcoin go down so much and what will happen in the future? After writing many emails about it and having many conversation on this topic, I decided to put some of my thoughts here as well.
Markets always overshoot, both on the upside and on the downside. Looking back to what happened a year ago when Bitcoin hit all time highs almost every day around this time, it’s now clear that the Bitcoin price went up way too fast and that it overshot it’s “real” value. What was happening is that because price went up so much demand increased fast, but nobody wanted to sell. That led to an even bigger increase in price, which in turn led to even more demand. This whole carousel stopped when the price hit almost $20,000 and some people started taking profits, meaning the supply went up. This caused the price to go down and some of the latest investors started to panic (they had never seen Bitcoin going down) and started to sell. The market stabilized after a couple of months and for many months the price hovered between $6000 and $8000. News reports about Bitcoin being more stable than Twitter stock came out, but they were a bit too fast.
Over the past couple of weeks Bitcoin saw another huge reduction in price. This happened all of a sudden and not many people had expected this (I for sure had not seen this coming). The main reason seems to have been the hard fork in Bitcoin Cash. I have never been a fan of Bitcoin Cash (BCH), mainly because of the scammers and criminals behind it and because of how they have been trying to destroy Bitcoin itself. The group behind BCH got into a disagreement about what the future of the coin should look like and that led to a split (a hard fork that split BCH into 2 different coins). Normally a hard fork pretty quickly has a winner and a loser, but because both parties behind the coins had tons of money they both invested crazy amounts o money in mining these coins to make their coin the winner. I think that what happened is that in order to finance this race, they had to sell their Bitcoin. This led to an increase in supply while demand was very stable, with a huge drop in prices as a result. That caused a panic among people that still held their Bitcoin and believed it would never go below $6000 (“Bitcoin might go to zero!”) so a whole wave of new selling occurred, causing Bitcoin to drop even further.
What we are seeing now is another example of the market overshooting its target, but now on the downside. My gut feeling tells me that Bitcoin would be fairly priced in the $12,000-$15,000 range right now (which would be more in line with prices that most miners could profitably mine at), but in reality the price is in the $3000-4000 range. It’s once again supply and demand: a year ago everybody wanted to buy and not many people wanting to sell, now it’s a lot of people trying to sell their coins while there is not a lot of demand. I believe today’s prices are a great entry point if you are new investor or a good way to get a lower average price of your coins. Sure, Bitcoin could go down even more, especially with people selling for tax purposes (losses that can offset capital gains), but I don’t see it going much lower anymore.
I am actually surprised prices are so low, even though with hindsight I can explain why it happened. But I also know this bear market won’t last forever, simply because too much is happening in the space. Earlier this year I publicly said that I expected the Bitcoin price to be in the $20,000-$30,000 range by the end of 2018. This prediction was based on institutional capital coming into the market. That has not materialized yet, simply because it took much longer to get products and services approved. For example, a Bitcoin ETF has still not been approved by the SEC, despite many reputable companies filing to launch one. It will happen eventually (put February 27, 2019 in your calendar, by then there will be a final decision on the Van Eck ETF, the most promising candidate to be approved), and once it happens it may be a catalyst for a new bull run. But also other institutional products took a lot longer to get to market, for example institutional custodians and institutional exchanges. But that is all changing, with Goldman Sachs investing in BitGo and Fidelity launching a crypto custody product. Also a Bitcoin settled future will have a big impact (BAKKT will launch this in late January 2019), because in order to settle the transaction physical Bitcoins have to be bought (so far all Bitcoin futures were cash settled), meaning increased demand for coins. Once these products are live it will be a matter of time. None of the institutions wants to be first, but once one or two announce that they invest in crypto the others will follow. Nobody wants to be last either, so everybody aims to be a fast follower. When will this happen? Nobody can tell, but given the time frame when these products will be live I think prices a year from now may be significantly higher.
My long term view on Bitcoin has not changed at all. I still believe that Bitcoin might eventually be worth hundred of thousands of dollars per coin. My views on this are even stronger now than a year ago, partly because of new developments in the space (things like Lightning Network that will make Bitcoin a currency with lightning fast transactions at almost zero cost) and partly because I have changed my view on Altcoins significantly. A year ago I still believed we would have a world with hundreds of altcoins that could all be very valuable. Now I believe we will end up with maybe 10-20 valuable altcoins, while the rest may go to zero. Only the altcoins with strong teams and with properties that other coins don’t have will survive. Several of the top 10 coins may not survive, even the number 2 coin (XRP) will likely disappear once the SEC determines it is a security. I am also not that worried about forks anymore. Bitcoin has proven many times that it can survive hard forks, and the current slow death spiral of Bitcoin Cash is another example of this. The increase in Bitcoin dominance (the Bitcoin market cap as a percentage of the total crypto market cap) to over 50% shows this as well.
The current bear market reminds me of the dot com boom and bust in the early 2000s. At that time the media predicted the end of the Internet and that e-commence would never work. But guess what, 18 years later the most valuable companies in the world are the tech companies that nobody believed in anymore. Amazon went down from close to $100 to $6 during the dot com bust, Bitcoin is actually doing relatively well compared to that decline. This year Amazon hit $2000, over 20 times its all time high during the dot com boom and over 300 times the value during the bust. Assuming Bitcoin is the next Amazon a 20X at its all time high would be a price of $400,000 and a 300X based on the current price would be more than $1 million per Bitcoin. Don’t give up on Bitcoin yet!