"Wise men are instructed by reason;
Men of less understanding, by experience;
The most ignorant, by necessity;
The beasts by nature."
"Wise men are instructed by reason;
Men of less understanding, by experience;
The most ignorant, by necessity;
The beasts by nature."
Let me start off by saying that I love Bitcoin and think it will completely destroy the financial market with time -- but not yet. I think in the long term Bitcoin will be huge, however, in the short term it is ready for and poised for a big correction.
I've been following Bitcoin since it was around $5 per coin in 2012. I bought my first Bitcoin at $45 and I started my first Bitcoin company shortly thereafter. I am a huge advocate for Bitcoin and think it is revolutionary. I think at some point it could reach $100,000 or more. I think this because I get the true value of it and the way it solves the problem of an inflationary fiat currency supply controlled by a government. So I am in no way against Bitcoin or against what it is all about. I get all that and I support it more than anyone.
But right now Bitcoin is in a bubble. And it's not a bad thing, and it's not the first time. And it most certainly won't be the last time.
You see, this has already happened 2 times before in the history of bitcoin. It happened in April 2013 when it spiked around $250 and then dropped to about $20 a coin. When this happened everyone thought bitcoin was finished and that this was the end of it.
Once again, in December 2015 bitcoin spiked around $1,250 per coin during the Mt. Gox controversy of them getting hacked. During this time the price ran up really high and many people thought it could never go down and that bitcoin had finally reached the mainstream. And then it went down. Then it hit around 800. Then it slowly fell more. Then it hit 400. Bitcoin spent about a year bottoming out around 200 and then slowly started it slow climb back. For a year and a half or so bitcoin hung around 300 - 700 a coin. This was one of the most stable times for bitcoin. This is where we saw it shake out all the bad money and find a real price that reflected supply and demand.
But then once again around April 2017 we see the same pattern start to emerge. The price starts to rise. Bitcoin breaks $1,000 once again and people take notice.
Is it a coincidence that around the psychological point of $1,000 we start to see activity happen with the price again? I think not.
People start to buy back in thinking this thing could be the real deal. The price breaks $2,000 for the first time. Now it's really got some legs. The price breaks $3,000.
Now bitcoin has some real attention and the internal disputes within the bitcoin community are at an all time high as a fork of Bitcoin Cash is finally underway. Bitcoin Cash is forked from bitcoin on August 1, 2017 and bitcoin remains in tact. Once everyone realizes bitcoin is still operating fine everyone who was on the sideline piles back into bitcoin and sees it as safe. Now the price jumps over $4,000 a coin and at this point it continues to just keep rising really fast to where we are currently at over $7,000 per coin. The price has gone up around 7x from the start of 2017.
So if you look at the price you will see that it has had a few spikes where it reaches a bubble. If you're unsure of what an actual bubble looks like let's take a look:
We are currently in the greed phase. You will see this same pattern in April of 2013 and then again in Novermber/December of 2013. This has already happened twice before, almost to the exact same specifications as this chart shows. We are now seeing it happen once again but with a much greater magnitude. This isn't the first time, and it most certainly won't be the last.
It's also worth noting how Google trends mirrors the price of bitcoin quite closely:
Okay, so I don't fully know why the price is going up and I don't think anyone does. There are obviously lots of factors. The reason why the price of Bitcoin goes up in general are because of a few main reasons:
These are some of the main reasons and this is why over time it has gone up and why it will continue to go up over time. But the thing is, as is with any technology or useful product, as the price climbs the market will have price fluctuations and be pulled in different directions. We see this same type of thing with real estate, oil and gold. The prices sometimes get out of sync with reality and reach bubbles and then correct themselves. This is what markets do. People will see an opportunity, people will seize the opportunity and then the pendulum will shift from undervalued to overvalued. And with bitcoin we see really big shifts because 1) the market is still relatively new and uncharted and 2) it is much closer to a free market than pretty much any other asset class.
With bitcoin we don't have some federal agency buying and selling futures to manipulate the price of bitcoin like we do with almost every other financial market like bonds, stocks, real estate and even gold.
Bitcoin is really close to a free market and as such we see really big swings where you can win big or lose big. We don't have the safety net of some federal agency giving it oversight or trying to manage it (thank goodness). This is one of the main reasons people love bitcoin and why it gets so much attention.
Right now I'm pretty confident most people are only buying because the price is going up. I think many people do believe in bitcoin and do want to hold it long term, but I think people care more about wanting to now get in before it's too late. I think many people do think bitcoin will at some point hit $50,000 or even $100,000 a coin and they think now may be it. Perhaps some people think this is when bitcoin is about to breakthrough to the mainstream and they want to get in now before it's too late.
I don't think we're there yet.
Like I said, I don't think this is the last time we will see a bitcoin bubble. I think an even larger one or two still await as we see bitcoin reach into the mainstream. Right now the bitcoin market cap is around $120 billion. If we ever want to see prices north of $100,000 we are looking at a market cap of well over $1 trillion. Is this possible? Of course it is. Is it possible this run? Even if it was, we're forgetting one really important thing: markets correct.
There is no such thing as a market never correcting. No stock or business only goes straight up. Sure the long term trend may be bullish, but in the short term, and in varying intervals, profits are taken and money is taken off the table. This is normal and healthy. And the profit taking of bitcoin is what keeps the price in check and allows a true clearing price of the market forces to be reached.
This same trend has happened twice already (April 2013 and December 2013) and both times the price corrected and stabilized. If we look at the price chart we can clearly see this. We have a normal price trend of where supply and demand places bitcoin for its utility. We see what the market is comfortable pricing bitcoin at. But then we see the greed kick in and the excitement shocks happen where people want to force a good thing. People know the price will go up and start to rush it. People start to buy wanting to get in before it's too late.
We saw a very similar thing happen with the US real estate bubble in 2006/2007. It's obviously a bit different because of lending and government intervention and whatnot, but it's a similar concept. Housing prices start to go up and people start to see quick, easy money. Pretty soon your neighbor refinanced their house to make a quick buck. Pretty soon your unemployed friends are all mortgage brokers making money flipping homes. We've seen it all before. And we're seeing it here. All you have to do is read posts on Reddit like the following to know a big correction is near:
My babysitter, to whom I've never mentioned Bitcoin, asked to be paid in Bitcoin.
Edit: I paid her in Bitcoin. She's my children's babysitter, to whom I've never spoken about Bitcoin. After explaining the risks, she still had me set her up with a wallet and wanted to be paid in Bitcoin. $45 USD worth. She's thinking about it as a superior savings mechanism. She's a 55 year old grandmother who wants her spending money to stop burning a hole in her pocket.
(And yes, I made sure to have her record her backup phrase and demonstrated the importance of keeping it safe)
Edit X: found out that she heard about Bitcoin from a friend of hers, then she heard my wife mention Bitcoin to me, then she asked me about it.
Obviously this isn't super extreme, but it's getting close to along the lines of your friend next door who knows nothing about what bitcoin even is buying it just because. Where have I seen this before? I get that this type of thing has to happen and will happen as bitcoin grows, but not without a correction first, that's all.
And this brings me to my next point.
I'm not saying it's hard to get out from a technical standpoint. It's easy to exchange bitcoin on an exchange for fiat currency. I'm saying it's hard to get out from a legal standpoint. Most exchanges only allow you do withdraw low amounts (relatively speaking) of bitcoin at a time. And this is because you're now dealing with the government again. When you're dealing with fiat currency you're dealing with the government. And when you're dealing with the government you're dealing with lots of laws and regulations -- especially when it comes to currency. And it's obviously not a bad thing. I get that they want to know where your money is coming from and make sure you are paying your taxes on it and all that. Of course I get all that. But what comes with that is lots of restrictions on the speed at which you can go in and out of bitcoin -- especially out.
You can't easily pull out $1,000,000 worth of bitcoin without going through multiple exchanges and in multiple chunks over multiple weeks. It's just not that simple. And because of this it has an effect on the price. Sure you can trade bitcoin easily, but you can't realize real gains easily. You can't turn it into fiat quick. You can store fiat in your exchange, but that's not the same as storing fiat in your bank account or in a real asset like real estate.
It's one thing to be a bitcoin millionaire. It's another thing to actually convert that million dollars of bitcoin into something real without the price dropping, especially when many bitcoin millionaires are taking profits. And for a lot of bitcoin people they would rather just hold bitcoin than deal with the headache of taking large profits. It's just too much of a pain in the ass to actually pull out millions of dollars of bitcoin.
And of course, I get that most people, as myself, are holding bitcoin for the long term. But that's not to say that profit taking doesn't happen in markets and at a certain price point people will take some money off the table.
It just so happens to be that profit taking is tricky to do with bitcoin and there is friction involved when you want to convert to fiat.
It is also much more difficult to pull fiat out of bitcoin than to put fiat into bitcoin. When you're putting fiat in bitcoin doesn't care where your fiat comes from. When you're pulling fiat out the government wants to know exactly where your fiat came from. So this creates a pressure in just keeping your bitcoin which makes it less likely for people to want to pull out. If it was easier to do and had less political risk people would. This is government creating a distortion in an otherwise very free and unregulated market.
Another thing to look at is the transaction volume. If bitcoin is being adopted then surely the amount of transactions should be going up right? Throughout the history of bitcoin we have seen the number of transactions per day go up. You would expect this to happen as more people use it. More people, more transactions. However, almost coinciding directly with the steep rise in price around April of 2017 we see the number of daily transactions go sideways or even slightly decline:
Sure, of course if more people are using bitcoin the amount of transactions should and does go up. But there is more to it than that, and this does get a bit technical.
An ongoing "problem" in the bitcoin space is transaction fees. This was the main reason for the Bitcoin Cash fork in August 1, 2017. As bitcoin has grown so too have the fees for transactions. And in many ways it could be argued that this is the price you pay for an open, secure and stable blockchain. Sure, however, the thing is is that there are lots of other cryptocurrencies out there also.
If it costs us $3 to send $50 worth of bitcoin we could send that same $50 with litecoin, ethereum or dash for $0.02. Bitcoin isn't the only cryptocurrency and there are other cryptocurrencies that offer differences, whether baked into the currency itself or a result of its smaller size.
What I'm saying is this: even though the transaction volume of bitcoin may not be going up relative to the price that doesn't mean that the utility isn't going up. It may turn out that bitcoin is less about transactions and more about storing cryptocurrency. Bitcoin may be the gold used for savings while other currencies may be the silver used for transactions. We don't fully know. The most stable and secure cryptocurrency probably will have the largest fees and it probably will see less transaction volume. And if we see an increase in transaction volume elsewhere then perhaps that is a good thing.
So I'm not saying transaction volume is everything, but I am saying it is something. And if we look at other currencies like Ethereum we can see that even though it is having an increase in transaction volume the price remains flat at around $300.
There is another really interesting thing to look at here. Now I'm in the crypto space so I follow this stuff fairly closely and see the price fluctuations that happen between currencies on a steady basis. One thing I've taken notice to is the dominance of bitcoin over other cryptocurrencies, especially the last month or so.
If we go back to when the price of bitcoin was around $4,000 its dominance in the market was around 40% or so. This means that 40% of people's money was in bitcoin while the other 60% was in all the other cryptocurrencies. Today, that dominance for bitcoin has changed to 60%. This means that people are choosing bitcoin over other cryptocurrencies. And this change has happened all within literally 2 months. Why you ask? I would say because bitcoin is becoming overvalued relative to other cryptocurrencies. People are buying bitcoin because they specifically want bitcoin over the other cryptos because that's the one that is going up.
And funny enough, it's "all" of "Bitcoin" -- Bitcoin Cash is along for the ride too. Bitcoin Cash since its release stabilized around $300. But sure enough, within the last few days it has gone from $300 to over $600 magically. It's not magic, it's just hype. Strange how we don't see this sudden rise in any other of the top 6 cryptocurrencies. We only see bitcoin and bitcoin cash with these sudden rises. Ethereum, ripple, litecoin and dash apparently didn't get the memo. Begin a recent fork, bitcoin cash is categorically similar to bitcoin. If anything it should be something different than bitcoin that is going up, not bitcoin cash.
It's as if people hear the hype of Bitcoin, see the price rise and want to get in. Once they realize that the price of bitcoin is too high (even though you can buy a fraction) they decide that they are too late to the gravy train. So they look for their next best option.
Ethereum? Nah. Ripple? What's that? Litecoin? Heard about it. Bitcoin Cash? HELL! YEAH!
So they go for it, thinking that maybe they missed the bitcoin boat but at least arrived in time for the bitcoin cash boat.
Again this is all just my view, but I think something like this is going on and it's kind of funny to think about the mindset of somebody as they search for bitcoin and find out about this stuff. I mean it gets technical and most people don't know any of the technicals. The website bitcoin.com itself is a large supporter of Bitcoin Cash and if you're new to bitcoin you don't know this nor do you really know the difference between the two. So you land on bitcoin.com, see something talking about how bitcoin cash is bitcoin and then think to yourself you're ready to buy some "bitcoin". Again, I'm not here to bash bitcoin cash, I'm just trying to understand the mindset of the average person who knows very little about bitcoin and the confusion they must face.
Ethereum should be going up if the cryptocurrency space is rising and being adopted. This is what Ethereum did before the last few months. But with this current spike in Bitcoin no other currency seems to want to move with it. In the past other currencies have mirrored closely what bitcoin has done. But we are seeing a bit of a divergence right now.
Here are price graphs of the top 6 cryptocurrencies:
Note that when priced in BTC we are seeing the graph decline or go sideways. They aren't maintaining parity with the bitcoin price. Why aren't other cryptocurrencies going up? Why only Bitcoin? The transaction volume of Ethereum is going up, yet the price is remaining around $300. I think I have a bit of an idea why.
Okay, well now that I've said all this what do I think will happen? Well, like anyone else I obviously don't know. Nobody does. But based off of the past history of bitcoin and what I know about it I will give my forecast. It will be interesting to see how this pans out.
Very soon (within the next month probably (somewhat variable on possible mid Novermber fork)) we will see the price start to collapse. It may take until the New Year to happen but I doubt it. I thought this would happen at $6,000 but it shot right past that. We are well overdue at this point. So within the next month or so a collapse will start. From there we will see it go down quite a bit to maybe $4,000 - $5,000, maybe even $3,000. It will probably recover a bit. On this recovery it may even hit $6,000 again. This is known as a "dead cat bounce". In the bubble chart above it's called the "Return to normal". This is all within the next 3 months or so.
From there bitcoin will start its slow descent into oblivion once again. It will slowly, over the course of probably a year, give or take, reach around a more fair valuation of $2,000. It may be a bit higher than this. It may even be a bit lower. But I think we will see bitcoin go under $3,000 over the next year or so and I think it could go as low as $1,000 once again. During this period, once again, bitcoin will be dead and everyone will be saying I told you so. If you care about the long term growth of bitcoin it is at this point you should be buying. Buy when everyone has once again forgotten about bitcoin and it has clearly shown that it will never be anything great.
If this sounds crazy look at the history of bitcoin. In April 2013 when bitcoin hit $250 nobody ever thought it could hit $20 again. And yet it did. In December 2013 when bitcoin hit $1,250 nobody ever thought bitcoin would hit $200 again. And sure enough, a year or two later there it was, once everyone had forgotten about it. I think we will see a similar motif happen, but this time relative to the new high.
I think Warren Buffett was right when he said:
Be fearful when others are greedy and greedy only when others are fearful
But he was clearly wrong when he said:
Stay away from it [Bitcoin]. It's a mirage, basically...The idea that it has some huge intrinsic value is a joke in my view.
Remember, I'm as pro bitcoin as anyone you will meet. I get it and love it. But I'm also pro-accuracy. Saying it's overvalued if it is isn't me being anti-bitcoin, it's me being pro-accuracy. Saying bitcoin was overvalued at $1250 in December 2013 wasn't anti-bitcoin, it was accurate.
There are way too many anomalies that have started to happen around April 2017 for me to turn a blind eye. When you're looking at multiple data points on a daily basis you notice when something looks off. And then when you research that thing that looks off it coincides with what your gut is telling you.
I'm obviously not an expert. I'm not a day trader and I don't even care about trading bitcoin. I care much more about building businesses around it and supporting its adoption. I care much more about it out-competing the current financial sector. But I can't help but notice these patterns. They're staring me right in the face so I figured I would say something.
I could be wrong. Bitcoin could continue to rise. Bitcoin may never bottom back out again. But I think that is highly unlikely. Markets inevitably have to correct and nothing goes up forever, not even the best business.
Again, this is not the say the future for bitcoin is not bright -- it obviously is. In the long term I think bitcoin (or some other cryptocurrency that takes its place) will reach a market cap of over $1 trillion. I just don't think we're there yet and there will be many corrections before we get there.
I can't help but think of Simba in the Lion King wanting to be king and being really anxious about it. All the while Zazu, the bird, is trying to tell him "Not Yet!":
That's what's going on with bitcoin. It can't wait to be king, just not quite yet. Patience my friend, patience. It has had incredible growth since its inception. It is mind boggling if you think about it. People are taking it seriously and it is reaching a broader and broader audience. It's getting there, but it's not there yet and it still has a ways to go. That's a good thing. Let's ride this thing out and enjoy watching it change the world and shatter paradigms one by one.Filed under: Internet / Tech, Bitcoin, To The Moon (but not yet), Fearful when others are greedy, Bitcoin Bubble 3.0, Get rich quick, Why work when bitcoin?