Bitcoin - A Possible Triple By The End Of The Year

Summary

• While bitcoin has fallen a lot, it has likely hit the bottom.
• The many models I provide give different price targets for different times, but the common targets seem to be about $25,000 by the end of the year and about $91,000.
• We could see a spike to $74,000 by early September, or even a spike to $130,000 by mid-2018, or we could just get $20,000 by mid-year.

A lot has happened to bitcoin since my December 10 article. It seems like bitcoin (BTC-USD) (COIN) (OTC:GBTC) bears got the decline they were waiting for. After surging nearly 1300% in 2017, bitcoin peaked at $19,343 on Sunday, December 17, 2017, and bottomed 69.2% lower at $5,957 early Tuesday, February 6, 2018. It seemed to be making a comeback, surging to $11,480 on March 4, before plunging again to $6,444 on April 1. Is bitcoin a short-term buy now? Why has bitcoin fallen so much? Did the bitcoin bubble pop? Where will bitcoin's price be at the end of this year? I provide updated models and an updated Elliot Wave graph. Further, I look into the value of bitcoin as a currency.

Is bitcoin a short-term buy now?

Yes. Based solely on the 1-year technical graph of NYSE Bitcoin Index (NYXBT), bitcoin looks a great short-term buy with the W%R at -100.00 (extremely oversold and the lowest reading possible) and the RSI at 33.20 (almost oversold). The price is at its 200-day moving average, which could be significant support. The price is also near its lower Bollinger Band, a possible buy signal, and has formed a bullish double bottom.

Source: Stockcharts.com

Why bitcoin has fallen so much, and are fears overdone?

Bearish news of governments possibly banning bitcoin was one of the biggest fears leading up to the cryptocurrencies big plunge. On September 8, bitcoin plunged on news of bans by Chinese exchanges, but that fear was later capped by the government allowing bitcoin to trade over-the-counter. On November 8, India also banned bitcoin as a currency but embraced blockchain technology. Then on December 13, South Korea planned to ban banks from dealing with cryptocurrencies. Bitcoin peaked on December 17. But unless all countries around the world ban bitcoin, it will survive by moving from one country to the next. Below is the exchange distribution volume as of April 1, 2018. As shown in the graph, Japan makes up 45% of all bitcoin transactions, the U.S. makes up 37%, and the eurozone makes up 15%, meaning that the rest of the world only makes up 3% of all bitcoin transactions.

Source: Exchange Volume Distribution

Another big fear was bitcoin's rising transaction fee. This led to the assumption that a high bitcoin price equals a high transaction fee. While the average fee did soar from $0.40 in January of 2017 to about $55 on December 21, the average fee on April 1 was $0.93, the same average fee as on April 21, 2017, when bitcoin's price was $1,257. It is also important to note that this was an average. Fees are paid based on how fast you want the transaction to go through and in satoshis (or 0.00000001 of a bitcoin) per byte. Thus, the size and speed of the transaction determine the final fee.

But the main reason why bitcoin fell might have been because of Wall Street and one big whale. The peak in bitcoin happened one day before bitcoin futures started trading on CME, formally the Chicago Mercantile Exchange. The world's largest futures exchange started trading bitcoin futures on December 18 under the ticker symbol "BTC." Its smaller rival, CBOE or Chicago Board Options Exchange, started trading bitcoin futures on December 10 under the ticker symbol "XBT." Some analysts were already predicting bitcoin's fall due to CME futures, saying that "futures would provide bears with a means to short large quantities of bitcoin." And the first long-term bitcoin option was priced at $10,000 with an expiration date on December 28. Bitcoin hit about $14,400 on December 28, down from its peak around 19,000. Additionally, Nobuaki Kobayashi, a bitcoin whale, sold over $400 million worth of bitcoin and Bitcoin Cash from December 2017 to February 2018. Data science firm Chainalysis argued that such selling by one big whale in combination with regulatory news and peak of positive sentiment could have led to herd behavior and a domino effect. Fellow contributor Zhuoqi Gao found a "strong correlation between bitcoin futures and underlying bitcoin pricing."

Did the bitcoin bubble pop?

The rapid surge by bitcoin was seen by some as a bubble, and probably it was. We have seen it before. In late 2013, bitcoin surged 750% in less than two months "largely due to Chinese demand as a way to invest a lot of money out of China." The bubble then popped as "China's central bank barred banks from handling bitcoin transactions." In the next 19 days, bitcoin plunged 70.3% from $1,009 to $300. After recovering nearly half of what it lost, bitcoin then declined to $219 over a year later, a total drop of 82.4%. In the current spike, bitcoin surged 750% in five months before plunging 69.2% from $19,343 to $5,957 in 1 month and 20 days. And just like in 2013, regulation was the source of the panic. It is very possible that bitcoin prices became extremely overvalued and were in another bubble, as they were in 2013.

Source: Bitcoin Price

Where is bitcoin going now? Update to my pricing models

To give an estimated answer to the question, I will first update the three models I made in my first bitcoin article.

Model 1: Below is a graph of bitcoin's price from June 30, 2013 - April 1, 2018, at 19 UTC. The green line is the 200-day moving average, and the red line is the 50-day moving average. The black line is the polynomial best fit trendline, which gives a price of $13,240.58 for April 1, 2018. Also, notice the trendline seems to touch most of the maximum prices. I added an orange line to connect most of the minimum prices. This orange line will help determine the outliers in Model 2.

Source: Created from Coindesk's Bitcoin Data

Bitstamp's bitcoin forecast shown below gives a short-term price of $6,621.85 on April 2, 2018, and a long-term price of $21,284.86 on July 28, 2018. Model 1 gives a similar price of $20,723.99 on July 28, 2018.

Source: Bitcoin Forecast

Model 2: The price of bitcoin seems to follow a minimum price, as shown by the orange line in Model 1, which can be roughly modeled by omitting the price spikes (outliers). Below is a graph of bitcoin's price when omitting outliers from June 30, 2013 - April 1, 2018, at 19 UTC. The green line is the 200-day moving average, and the red line is the 50-day moving average. The solid black line is the polynomial best fit trendline, which gives a price of $7,599.14 for April 1, 2018, and $12,929.17 on July 28, 2018.

Source: Created from Coindesk's Bitcoin Data

Model 3: For gold, the fundamental minimum price seems to be the cost of mining. If bitcoin is seen like gold, the fundamental minimum price of bitcoin should be the cost of mining the cryptocurrency (cost of electricity), which could be estimated by using the hash rate. Below is a graph of bitcoin's estimated cost of mining from June 30, 2013 - March 31, 2018. This was estimated by using the points ($150, 2/7/15), ($150, 10/2/14), ($100, 8/15/14), ($100, 6/16/14), and ($50 for 2/18/14) and a conversion factor (hash rate divided by price). The polynomial best fit trendline gives a cost of $9,670.69 for April 1, 2018 and $14,655.61 on July 28, 2018. The green line is the 200-day moving average, and the red line is the 50-day moving average.

Source: Hash rate

The table below calculates where bitcoin will be at the end of each year over the next 10 years. From the table, it seems that model 3 is the most realistic, while both models 1 and 2 seem like bubbles.

Bitcoin bull John McAfee's prediction that prices would reach $1 million by mid-2020 seems to match Model 3, which says prices would hit $1.2 million at the end of 2024. Model 3 also seems to closely match Fundstrat's Thomas Lee prediction that bitcoin will hit $25,000 by the end of the year and $91,000 by March of 2020. McAfee appears to be using a minimum price trendline, shown on the left in the image below, to make his prediction, while Lee is using a logarithmic technical model, shown on the right in the image below, to make his prediction. Maybe they think bitcoin will move like gold too.

Source: McAfee's $1 million bet and Lee's $91,000 prediction

But isn't bitcoin a currency and not a store of value like gold?

Some people argue that since bitcoin was made to be a currency, it should be considered a currency and thus valued like one. After all, bitcoin was created to provide a means of exchange outside of the banking system and not controlled by government or any one entity. Seeking Alpha member Alphatag suggested in a comment here to use the quantity theory of money. The quantity theory of money was also mentioned in MarketWatch's September 19, 2017, article. Further, the price seems to have matched the transaction volume well.

Source: Bitcoin Continues Exponential Growth in 2016 : Blockchain Letter, February 2017

The macroeconomic principle states that an increase in the velocity of money leads to an increase in price. According to Alphatag, "historically, the total amount of a currency outstanding is equal to one-fourth of its yearly use in transactions." So the price of bitcoin equals one-fourth the annualized transaction dollar amount divided by the current supply of bitcoin. That gives a price of $5,552.56 for March 31, 2018, using data for transactions per day, market price, and supply in circulation. This was about $1,400 less than the price of $6,935.48 on March 31 at 0:00 UTC. Calculations are in the table below.

Thus, finding the future value of bitcoin as a currency involves estimating its future transaction volume in dollars. Despite the recent plunge in transaction volume, there are still many uses of bitcoin including cross border and wire transfers. Based on the image below of the location of bitcoin venues, there are currently 12,162 bitcoin venues worldwide, mostly in Japan, Europe, and the U.S. The number of brick-and-mortar businesses accepting bitcoin has been growing about 7-8% per quarter since the first quarter of 2017. If the annual transaction volume returns to $2.76 trillion, which was the peak hit on December 13, 2006, when bitcoin hits maximum supply, the price would be about $32,872 per coin.

Source: Coinmap.org

But U.S. District Judge Jack Weinstein of New York ruled that bitcoin is like a commodity. I agree and ask why cannot bitcoin be both a currency and a store of value like gold? Gold can be used as a currency, though not a good one. Bitcoin can be used as a currency, though not a good one. Many people believe gold is guaranteed to maintain its value if the global financial system collapses. Like gold, bitcoin is also not connected to the global financial system, and may maintain its value if the global financial system collapses. And for bitcoin's high volatility, it actually has been slightly less volatile than gold's when the dollar got off the gold standard.

Source: Store of Value?

If like gold, what is bitcoin's maximum value?

In my last bitcoin article, I argued that bitcoin could reach the total investment value of gold. On December 10, 2017, the value of the world's gold (GLD) was $7.589 trillion. This value is also close to the $7.6 trillion in physical coins and banknotes in the world. As of April 1, about four months later, world's gold was valued at $8.128 trillion, and 34% (or $2.764 trillion) of that is used for investment. The maximum circulation supply is estimated to be 2.78 million-3.79 million less than the maximum mined supply. Thus, the maximum circulation supply may be only 17.21 million-18.22 million bitcoins. This would give a bitcoin price of:

• $151,675 if 18.22 million is used for the maximum circulation supply
• $160,576 if 17.21 million is used for the maximum circulation supply

Both Thomas Lee and the CEO Bill Barhydt of Abra, a cryptocurrency app company, also think bitcoin could rise much higher. A total of $297 trillion are in real estate, stocks and other equities, and gold. Lee states that if bitcoin captures just 1% of that market, it would translate into about $150,000 per coin. Further, Lee argues that bitcoin remains largely uncorrelated to markets like gold and therefore can be another way for investors to reduce overall portfolio risk (beta) and increase alpha. But Barhydt is a little more conservative, noting that another boom could happen in 2018 as investors and western institutions start to put 0.5% into cryptocurrencies, following their Japanese counterparts.

What does the Elliot Wave graph say about bitcoin?

Model 2 attempts to predict the minimum value of bitcoin. But can we predict the rapid rise and fall in bitcoin prices? Elliot Wave Theory says that "collective investor psychology" influences price movement of an asset. The key to Elliot Wave Theory appears to be to watch if the investor is becoming too bullish or too bearish and do the opposite. Below is the graph of bitcoin's price from January 1, 2017, to April 1, 2018, at 19 UTC. The black line is the polynomial best fit trendline. It is also the resistance curve connecting Wave #1, Wave #3, and Wave B. The orange line is the projection of that curve to Wave #2. It can be seen that the price has roughly oscillated between the upper black resistance line and the lower orange support line. The green line is the 200-day moving average, and the red line is the 50-day moving average.

Source: Created from Coindesk's Bitcoin Data

Below is a table of the date, price, length, and general description (green) of each wave in Elliot Wave theory.

Source: General description from Elliott Wave principle

It is interesting that in commodities, Wave #5 is the largest wave. This fits my theory that bitcoin acts more like gold than a currency. And bitcoin does seem to follow the general descriptions well:

• Wave #3 is about 61.8% higher than Wave #1: $3,018.54 x 1.618 = $4,884.00
• Wave C length is about 1.618 times Wave A length: $6,713.23 x 1.618 = $10,862.01

Using past bitcoin waves, the list below attempts to predict the next nine waves.

• Wave #2: $11,713.13 x (1-35.8%) = $7,523.86 on March 27
• Wave #3: $7,523.86 x (1+155.3%) = $19,210.75 on May 13
• Wave #4: $19,210.75 x (1-34.8%) = $12,519.75 on May 27
• Wave #5: $12,519.75 x (1+499.5%) = $75,058.65 on August 29
• Wave A: $75,058.65 x (1-34.7%) = $49,008.66 on September 11
• Wave B: $46,979.84 x (1+35.7%) = $66,493.84 on September 19
• Wave C: $63,741.19 x (1-59.7%) = $26,830.07 on October 19
• Wave #1: $26,830.07 x (1+62.4%) = $45,451.58 on November 3
• Wave #2: $45,451.58 x (1-35.8%) = $29,195.53 on December 8

Bitcoin fell down to $6,444.56 on April 1 at 16 UTC. But since this is still above the Wave C intermediate low of $5,957 early February 6, the model still holds. Wave #2 just moves down to $6,816.74 and later to April 1. Thus, the model should be moved down by $707.11 and 5 days later.

• Wave #3: $18,503.64 on May 18
• Wave #4: $11,812.63 on June 1
• Wave #5: $74,351.54 on September 3
• Wave A: $48,301.55 on September 16
• Wave B: $65,786.73 on September 24
• Wave C: $26,122.95 on October 24
• Wave #1: $44,744.47 on November 8
• Wave #2: $28,488.42 on December 13

As mentioned earlier, Fundstrat's Thomas Lee says bitcoin will hit $25,000 by the end of the year. But he also says bitcoin will hit $20,000 by mid-year and Lee defends his mid-year target by saying that "73% of bitcoin bottoms are V-shaped." Based on my above predictions, I see a much higher target by mid-year, $74,351.54 on September 3. But I give a target of $28,488.42 by December 13, which roughly fits Lee's target of $25,000 by the end of the year.

Looking at the Elliot Wave super cycle shown below, the price likely hit a Wave #4 bottom and the next stop is likely Wave #5. If the time between the previous Wave #3 and Wave #5 is the same, Wave #5 would peak as about $130,000 by mid-2018.

Source: "Dead again? In Reality Bitcoin Is Up 729% Since Last February"

Conclusion

While bitcoin has fallen a lot, it has likely hit the bottom. The many models I provide give different price targets for different times, but the common targets seem to be about $25,000 by the end of the year and about $91,000 by March of 2020.

Disclosure: I am/we are long GBTC. 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.