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Bitcoin Bear, Blockchain Bull

|Includes: Bitcoin USD (BTC-USD)

Bitcoin ETFs won't increase bitcoin ownership or allow for its use as a currency.

Bitcoin bulls now face the counterforce of short-selling bitcoin bears.

If bitcoin perpetually appreciated against all other currencies, it would likely never be used as a currency.

            Bitcoin has made astounding price movements that have been very interesting to watch. It peaked at a height of $19,511 on December 18, 2017, and since then has tumbled 67% to around $6,500 at the time of this writing. It has dipped below $6,000 four times this year. Its price recoveries have been lower than previous highs.

Bitcoin's recoveries this year have been consecutively lower. Bitcoin's recoveries this year have been consecutively lower.

            But if the history of bitcoin's price movements indicate its future path then it is quite possible, if not likely, that it will recover. After all, it has tumbled before only to rise again once in 2011 and twice in 2013. However, there may be differences in the market now that prevent or slow another rise in the digital asset’s value. Also, bitcoin’s premise of utility as a currency may be incompatible with perpetually appreciating value.

Launch of Futures Markets

            One thing that is different within the bitcoin market now as compared to previous years is the presence of a futures market. Until now, the bitcoin market has been dominated by crypto-enthusiasts. Demand for the digital coins has been driven by those who believe that cryptocurrencies will become widely adopted as currencies and will appreciate in value against traditional currencies. But now, people who believe bitcoin is overvalued can use futures markets to bet against the assets.

            Futures allow bitcoin short-sellers to make money when prices decline by selling borrowed coins, then buying new coins once the price goes down to return those borrowed. Short-sellers profit by pocketing the difference. The introduction of futures markets means that bitcoin prices will no longer be solely influenced by enthusiasts. Now the price is also influenced by short-sellers who are betting against the assets. One bitcoin commentator reviewed several studies about the effects of short-selling and found that the presence of short-sellers in a market can act as a counterforce against speculation. That counterforce against over-speculation may limit or prevent price bubbles. Of course, it could be just coincidental, but it’s interesting to note that bitcoin futures were launched on December 8, 2017. It was 10 days later on December 18 that bitcoin began to drop in value.

Diminishing Demand

            Another difference in crypto markets is that before 2018, there were probably still people who were not familiar with bitcoin and cryptocurrencies. Anyone who had not heard about bitcoin before 2018 probably has by now. Most people who are interested in owning bitcoin probably already do. If the astounding ascent of bitcoin prices in 2017 was fueled by demand from people interested in owning the assets, then it would require a significant increase in the number of new people wanting to own bitcoin to return it to its previous highs. However, it has been reported that the volumes of bitcoin transactions are at or near year lows. Also, Google Trend data shows bitcoin searches worldwide near the lowest levels in a year.

            Many of the truest bitcoin believers likely bought before the 2017 price run-up, while many of those who bought during the price run-up were likely attracted by the steadily rising price. The number of new true believers may not increase enough to cause further sustained rallies. There is speculation that if bitcoin ETFs are launched, more people will enter the space. This may prove true. But it is uncertain if any sustained price movements will result from crypto ETF approval.

            However, there are some things that are very certain about potential crypto ETFs. One thing that is certain is that because ETFs are structured as indirect investments, they will not attract anyone who actually wants to own cryptocurrency. Obviously, if you don’t actually own something, you can’t use it as a currency. So though ETFs will likely bring more investors into the space, it might not create many new true believers, and it likely won't contribute to its use as currency. For those reasons, price increases associated with ETF approvals may not be sustained.

Can Cryptos Perpetually Appreciate and Be a Currency

            One thing that is not different about bitcoin and cryptocurrency markets now and when they started is the view held by enthusiasts that bitcoin and cryptocurrencies will replace traditional currencies, and that the value of cryptocurrencies will continue to appreciate. “To the moon” is a commonly heard phrase used to express the bullish outlook held by bitcoin believers. One potential issue with this view is that a currency that perpetually appreciates against all other currencies will likely never be used to buy anything.

            A perpetually appreciating currency would likely only be used to purchase other currencies. I think of this as deflation in reverse. During deflation, when consumers expect prices of goods to keep falling, they delay their purchases because they know prices will be lower the longer they wait. In the reverse situation of a currency that perpetually gains value against other currencies, people would use it to increase their purchasing power, but not to actually buy things. For example, you could use dollars to buy bitcoin. When bitcoin appreciates against the dollar, then you would exchange your bitcoins for more dollars than you had before. Instead of using bitcoin to make purchases, it would be used to turn dollars into more dollars.

Bitcoin Bear, Blockchain Bull

            Will bitcoin repeat is phoenix-like movements, rise again and fly to the moon? Has bitcoin bottomed out at around the $6,000 level. Will ETF approval be the event that opens the floodgates and reignites the bitcoin surge? Will global financial systems fail, leaving bitcoin as the only viable currency? It’s possible. Though the fact that ETF structures won’t involve ownership of bitcoin or its use as a currency, combined with factors including the introduction of short-sellers, signs of diminishing demand, and the incompatible elements of perpetual price appreciation and widespread adoption as currency are reasons why I am bearish on the price of bitcoin. 

            Bitcoin price movements and the adoption of the underlying blockchain technology that allows crypto transactions are two separate factors. I see no reason why bitcoin prices would be correlated to the adoption rate of blockchain technology. Though I'm bearish on bitcoin prices, blockchain ledger technology could be potentially disruptive. Blockchain is likely a long-term play, as adoption of the tech will take time. Instead of buying bitcoin, blockchain believers might consider investing in one of the blockchain-focused ETFs that are available. For example, the passively managed Reality Shares BLCN ETF holds companies developing blockchain technology. 

Disclosure: I am/we are long BTC-USD, BLCN.

Additional disclosure: I own .0006 Bitcoin currently worth about $4 that I purchased to learn about crypto exchanges. I have no short position in bitcoin.