The Bottom Appears To Be In
The Bitcoin (COIN), (OTCQX:GBTC) boom, recently turned to bust may have finally found its bottom. The last year has been a wild roller coaster ride for Bitcoin and other digital assets. Bitcoin skyrocketed in the lead up to its futures listing. At one point BTC was up by a staggering 2,500% over the prior year. However, sentiment, hype, and hysteria reached a fever pitch late last year and some air was forced out of the Bitcoin bubble.
Bitcoin 1-Year Chart
Trees don’t grow to the sky, and Bitcoin can’t continue to go up indefinitely. Therefore, the price correction is a welcomed development. From peak to trough BTC fell from nearly $20,000 to slightly under $6,000. This represents a decline of roughly 70%, and is consistent with my $5,000 – $6,000 correction price target. To put things in context, it is important to mention that even at the bottom of this correction Bitcoin was still up by 500% over the prior year.
Perhaps more importantly, the fundamental picture has not changed for Bitcoin. It is still the preeminent digital asset in the world. Cryptocurrencies still represent an extremely small segment of the financial industry. Bitcoin is still on its path to become the predominant digital store of value. It still has one of the safest, most impregnable networks in the world. The Lightning Network is still going to come out later this year. And Bitcoin still has the distinct potential to capture significant market share in the global medium of exchange market. Therefore, once the conclusion of this correction is confirmed, the digital asset should regain its upward trajectory and move significantly higher throughout 2018.
Reasons for The Decline
One point important to emphasize is that the 70% drop in Bitcoin’s price is not indicative of detrimental fundamental issues. Instead, the decline is symbolic of short-term overheating in sentiment and price, a mini bubble so to say. Bitcoin has gone through several of these cycles throughout its existence. This is neither the first nor last such cycle concerning Bitcoin. There was too much hype, Bitcoin mania was rampant, people were taking out mortgages to buy Bitcoin, things were getting crazy, and the price needed to correct significantly, and it has.
Moreover, the situation was exacerbated by governments’ intervention, numerous hacks, cyber heists, frauds, scams, and other debacles that recently materialized in the cryptocurrency space. Thus, the price collapsed by 70%, but this is not the end for Bitcoin. To the contrary, this is only the beginning.
Bitcoin: Alive and Well, and Going Higher Throughout 2018
Why Bitcoin Will Continue to Lead and Altcoins Will Follow
Bitcoin is and should continue to be the gold standard of the digital asset world. It has the all-important first mover advantage. Bitcoin also has the safest, most secure network imaginable, coupled with a multibillion dollar infrastructure, capable to withstand the test of time. In addition, most coins are created to compliment Bitcoin, not to compete directly with it, especially not in the store of value space. Moreover, those coins that are created for transactional purposes are not nearly as well known or as adopted as Bitcoin. Bitcoin is the face of digital global commerce and with the introduction of the Lightning Network should remain the preferred choice for merchants and consumers alike.
Bitcoin’s market cap is around 35% of the total digital asset market. This is a significant drop from the 85% dominance Bitcoin had 1 year ago. But it is important to realize that as Bitcoin gained widespread recognition throughout the last year, so did numerous other altcoins. Many more ICOs were introduced, and the overall market became much more liquid and vibrant as a result. This is the first time that a wide array of market participants became aware of the numerous advantages various digital assets represent, and have the potential to have entire industries function around them.
Therefore, the decline in Bitcoin’s market share should not be perceived as a negative development for Bitcoin, but rather as a positive one for the whole cryptocurrency complex. Moreover, the 35% share seems appropriate for Bitcoin, as it implies that Bitcoin is the undisputed leader in the space but not an overwhelming one that consumes most of the market share and constricts the competitive landscape. Thus, the whole complex should begin to move upwards from here with Bitcoin maintaining a 30-35% market share in the space.
Digital Asset Total Market Cap
Cryptocurrencies still have a miniscule market cap in the greater scheme of things. The entire cryptocurrency complex is worth less than $400 billion. This does not seem like a great deal considering the enormous functionality digital assets can provide going forward. Cryptocurrencies have the potential to drastically improve numerous segments of the world economy. We have already seen this transpire with Ripple, greatly improving bank transfer transactions. We see this occurring with Monero, offering users a way to conduct transactions 100% anonymously. And the list of examples goes on and on.
Therefore, the future functionality prospect of digital assets is worth far more than the current $388 billion total market cap suggest. In fact, if we want to get an idea of how insignificant this figure is in the world’s financial system we just need to look at what other assets are worth.
- Investable Gold: $3.5 trillion
- Physical Currencies: $7.6 trillion
- M1 World Money Supply: $37 trillion
- World Stock Markets: $73 trillion
- M3 World Money Supply: $90.4 trillion
- Derivative Market: $544 trillion-$1.2 quadrillion
- Bitcoin: $137 billion
- Entire Cryptocurrency Complex: $388 billion
Bitcoin and cryptocurrencies are not going to replace all the derivatives in the world, and they are not a substitute for stocks. However, they can effectively compete in the store of value and mediums of exchange segments. This means that all market share in investible gold, physical currencies, and M1 – M3 money supplies is fair game. As of right now the $388 market cap represents less than 0.5%, or less than half of one percent of the $94 trillion market that investible gold and the M3 money supply occupy. With time, and as the functionality properties of Bitcoin and other cryptocurrencies becomes more mainstream, and widely adopted their market cap will continue to grow as they continuously capture market share from current fiat based assets.
Bitcoin a Store of Value
Bitcoin may not seem like a practical store of value right now because of its wildly fluctuating price. But this is because right now Bitcoin is still predominantly a creator of value in this stage of its development cycle. Obviously, market participants who bought BTC near $20,000 don’t feel that way, but Bitcoin is up by roughly 700% year to date, and there is no suggestion that the long-term trend of wealth creation will end any time soon. When Bitcoin reaches its long-term value potential volatility should be alleviated and Bitcoin will become a stable store of value.
Bitcoin Vs Gold
Bitcoin is a lot like gold, the two assets have many similarities, but Bitcoin appears to be much better than gold in many respects. Both are mined, have limited supplies, are widely recognized as having value, have medium of exchange properties, and are highly coveted assets on the world stage. However, Bitcoin is far easier to transact with. For instance, I can transfer $1 million worth of Bitcoin to someone in another country, on the other side of the globe, in minutes and at a minimal transaction cost. If I wanted to conduct the same transaction using gold, this would be a far more complex, costly, and dangerous procedure.
Bitcoin Vs Conventional Currencies
There is one thing that is true about all fiat currencies, and that is that they all eventually return to their intrinsic value, which is zero. We’ve seen this occur in various countries throughout history: Germany, Zimbabwe, various post-Soviet republics, we are currently seeing this occur in Venezuela, and even the USD has lost about 95% of its value since the Fed took over the U.S.’s monetary system in 1913. Just look at what has happened to the dollar over the last year. It is down by nearly 15%, and there is no end in sight to the declines.
All fiat currencies are backed by nothing, and have unlimited supplies, which is a perfect recipe for manipulation, abuse, and eventual disaster. The aftermath of this dynamic is usually as follows: the money supply is perpetually increased, this leads to diminished purchasing power, flowed by a loss of confidence, then panic, and ultimately culminates in the devaluation or the complete destruction of the paper money.
Bitcoin does not have this problem. The digital currency is decentralized, it cannot be overprinted, manipulated, devalued, copied or counterfeited. Moreover, there is a maximum of only 21 million Bitcoins that can ever be mined. Furthermore, Bitcoin exhibits all the major characteristics indicative of a desirable currency. Bitcoin is durable, easily divisible, highly transportable, extremely scarce, widely recognizable, is impossible to counterfeit, and when it reaches its long-term value potential, BTC will become stable as well as consistent.
Bitcoin Security Concerns
There is a common misconception going around that Bitcoin is not safe, can be replicated, can be hacked, and so on. The truth is that the Bitcoin protocol is one of the most, if not the most secure network in the world. In fact, it has never been hacked successfully, and the consensus amongst leading experts is that it is impregnable to cyberattacks using existing technology. It is possible that in a decade or so quantum computing could crack Bitcoin’s code, but by then there are likely to be more advanced security measures to combat such threats. What is certain is that Bitcoin’s network is far more secure than the SWIFT platform used by the current financial system which has been hacked repeatedly.
Those hacks, security breaches, and stolen Bitcoin you hear about on the news have nothing to do with Bitcoin’s network, but are the result of security shortcomings on the side of third parties. Exchanges, wallets, and other elements can be hacked, hijacked, and stolen but there is nothing wrong with the Bitcoin protocol itself. Moreover, individuals can take measures to keep their Bitcoin’s safe at all time by keeping them in a hardware wallet offline.
The Lightning Network
By now nearly everyone is aware of Bitcoin’s limitations as an effective currency. It is slow, doesn’t handle many transactions simultaneously, and is relatively expensive for many transactions. Well, if there is something that promises to solve all these faults it is the Lightning Network.
The Lightning Network is a protocol that creates an off-chain system by forming a network of payment channels that can be accessed by involved parties independent of the broader blockchain network. This is essentially an add-on to Bitcoin’s blockchain that solves scalability, speed, and cost issues by taking transactions off the main network and onto a more private system amongst the users of the underlying payment channel.
The Lightning Network can process thousands of transactions per second, compared to Bitcoin’s current limit of fewer than 10. Moreover, transactions are conducted at a fraction of the current cost, which makes the upgraded Bitcoin payment system cheaper than the current mass payment processing system, and capable of conducing millions of transactions per day much like Visa (V) and MasterCard (MA). Moreover, the Bitcoin network has added benefits, such as not having to transact through a third party, not having to convert to other currencies, and so on. The Lightning Network is scheduled to be launched sometime in mid-2018.
Recent Price Action: Indicative of a Bottom
We can see that Bitcoin hit the $6,000 level recently. The price actually dipped slightly below into the $5,000s briefly. What makes this decline unique is the drop was on massive volume indicative of major panic and capitulation. Moreover, the huge wave of selling was met with a fury of buying interest on massive volume suggestive of a bottom. In fact, this was the highest volume day by far over the last 2 years. The only time we can observe higher volume is by going back more than two years, and this was when Bitcoin was trading at significantly lower prices. This means that the amount of capital exchanged during this drop was by far the greatest ever on record, further indication that a bottom took place.
Bitcoin 2-Year Chart
In addition, the $6,000 level is consistent with extremely strong technical support in Bitcoin, and is the bottom price target I assigned to Bitcoin in several previous articles. There is always the chance of a retest of the $5,000 – $6,000, but it is extremely unlikely that Bitcoin will fall through this support level.
Bitcoin 3-Month Chart
Bitcoin 10-Day Chart
Threats to Bitcoin
There are a few elements on the radar that could have a negative impact on prices over the short-term. I am following the Tether and Bitfinex investigation closely. There is the chance that this fiasco could blow up, and the effects are likely to be a lot like the BitConnect debacle. If Tether and Bitfinex meltdown it will cause further loss of confidence and could create an additional wave of selling that may cause a retest of the lows. However, I don’t believe it will be enough to cause Bitcoin to fall below $5,000.
I am also keeping an eye on further government regulation in the U.S. and abroad for possible indication of direction. And the big thing I am looking forward to is the implementation of the Lightning Network later this year. If it is integrated successfully, and I believe that it will be, Bitcoin should benefit greatly and will rally accordingly on the news. However, if it is not introduced, or if it is not integrated properly, it should have a very negative impact on Bitcoin’s price.
Bottom Line: Bitcoin Is Likely Going Significantly Higher from Here
Detrimental developments and negative sentiment have been responsible for pushing Bitcoin lower after a spectacular run that caused the digital asset to get ahead of itself pricewise. However, the negative developments such as security breaches at exchanges, the BitConnect debacle, South Korean government intervention, and other factors are transitory in nature and are not indicative of fundamental faults having to do with Bitcoin directly. These are largely third party issues that are likely to work themselves out over time. Moreover, Bitcoin’s real fundamental shortcomings such as speed, scale, and cost are likely to be alleviated later this year by the implementation of the Lightning Network. In addition, there is an increasing amount of technical evidence that suggests that Bitcoin has bottomed. Therefore, the price is likely to regain its upward trajectory and resume its ascend higher throughout 2018.
Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
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Disclosure: I am/we are long Bitcoin.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.