Bitcoin. To be, or not to be, that is the question

Just several month ago, Bitcoin confidently marched across the globe, reaching $20,000 mark with 800 billion US dollars capitalization. Shortly thereafter, we witnessed massive market collapse that resulted in significant losses. Bitcoin lost about 66% of its market pvalue, while market capitalization went down to 260 billion USD. In this article, my main goal is to determine possible bitcoin behavior for 2018, but before doing that I need to look back and spot all major reasons behind Bitcoin crash.

What happened to Bitcoin?

Quite a lot of people believe that Bitcoin went down due to activity of “Cartel”. This belief comes from the article called “4th Dimension: Bitcoin-Manipulation-Cartel — Price-Suppression is the Goal” (Original article here) which suggests us, that some “Cartel” influences the price of Bitcoin and establishes market price through organized market and media manipulations. I tend to disagree with the author, as behavior demonstrated by Bitcoin is typical for any economical bubble. To prove that “Cartel” is real, author provided graphs of Uranium, Silver and Gold that look identical to Bitcoin.

Also, he specified that in several occasions, collapses happened after being introduced to futures market. There are several scientific problem with this approach:

• Author provides graphs of assets that were introduced to the futures market, and had significant decline after. But how accurate is that, considering that CME has hundreds of futures that were previously introduced?  How many of them actually collapsed after introduction, and how many of them didn’t have any significant influence on the market at all? Author deliberately picked graphs that fit his “theory” and ignored dozens of others.
• Economical bubble is characterized by enormous hype around specific asset. It’s quite natural for hyped assets to get listed on futures market near the peak of the bubble. In this case, futures can be a symptom of a “bubble”, but definitely not a reason for collapse.

Let’s compare graphs of typical bubble and Bitcoin graph. We can clearly see that Bitcoin follows specific pattern. Does it mean that Cartel caused all economical bubbles or it simply means that Bitcoin just follows general market laws?

• Despite popular belief that “market can be easily manipulated by one group of people” it’s not very accurate. Market is represented by several group of players including governments, Wall Street, hedge and investment funds, mining pools etc. Human mind tends to prefer “easy and simple answer” over “complicated and confusing”. It’s much easier to appoint guilty side, some “secret group”: cartel, masons, jews, aliens, Rotschild family rather than analyze the problem in a paradigm of complex historical, economical and political mechanism.  

So, what triggered or initiated this massive and long market correction?  The fall in value has been due to a plethora of factors including: regulatory restrictions on ICO’s and cryptocurrency, a ban on cryptocurency advertising from the largest internet marketing platforms (Like Facebook and Google), multiple restrictions from banks that barred customers from buying cryptocurrency via credit cards. Besides major bear strikes, we got kaleidoscope of smaller events that left bitter taste: Coincheck $400 million hack, USDT transparency scandal, Mt Gox sell-off.

The basic problem of Bitcoin is in its uncertainty of valuation. Unlike traditional stocks or bonds, Bitcoin pays no interest or dividends, making it hard to predict how much it will be worth. In this term, Bitcoin core value is based on people’s trust - it has value as long as people believe it has value. Think about it. Can Bitcoin exist if its price will be $1000? $500? $200 Yes, absolutely, it can, even though it will be a complete nightmare for miners.  

Bitcoin value is pushed upward due to several reasons:

• There is a demand for Bitcoin network (people run transactions).
• The supply of Bitcoins is permanently limited at 21 million coins. In a way, the value of Bitcoin has to increase to accommodate growing demand.

I can absolutely understand when Bitcoin went up from $1000 to $5800 as it gained global attention, and internet hype. Demand of Bitcoin network has increased, cryptocurrency-related businesses started to flourish. In this ecosystem, Bitcoin remained main trading pair, just like USD remains dominant fiat currency, pushing up market capitalization.

Trouble started after mid-November, when Bitcoin started to behave as bubble. All indicators were showing that despite rapid growth that happened in 30-days period, real DEMAND for Bitcoin hasn’t significantly changed. While market capitalization was growing, cash flow was decreasing or remained on the same level, hence Bitcoin wasn’t able to keep up with this artificial momentum.

How low can Bitcoin go and when to “jump on the train”?

At this point, our main goal is to calculate “the mean” and find the average value. I got two numbers:

A) 3800-4400

B) 4900 - 5500

I think that 4900 - 5500 is more likely to be our "mean line" because：

a) It corresponds with Fibbonacci retracement value (23.60%)

b) It’s a strong support zone which formed earlier in October.

c) If we will assume that our mean line is 3800-4400, then during “despair” phase, BTC should go down as low as $1800-$2400. This scenario is less likely to happen in my opinion.

What are some key indicators that will help us to identify stabilization and reversal movement of the market?

1) Reversal patterns like Inverted Head & Shoulders

Or  Double and Triple Bottom

Another important indicator is 1-Day candle. We are looking for candles like “Hammer” and “Inverted hammer”:

2) We should see some gradually increasing trendline. On 1-day candle graph it should look approximately like this:

3) Positive news environment. Any bullish market requires series of positive news. For example, right now news environment is not bullish at all:

• The Reserve Bank of India banned banks from allowing people to transfer money from their bank account into Bitcoin wallets.
• The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against Longfin Corp, a company that saw its price jump more than 2,000 percent late last year after it announced the acquisition of a blockchain startup.
• Spain's Tax Authorities Seek Crypto User Names and Bank Accounts

Will that attract new investors from Spain and India ? Unlikely.

Bubble popped. What now? Should I just cashout and leave the market?

Not every bubble kills the market. Let’s for example take a look at Housing Bubble and economical crisis in 2007-2008. If we will look at S&P we can see how devastating that burst was:

However, by 2013, market already recovered and by 2017 it has demonstrated 7 times growth (in compare with 2008 bottom). Keep in mind, cryptocurrency market falls and recovers quicker due to hype, low liquidity and smaller volume.

What can trigger possible recovery?

• Several large companies are supporting the ETF implementation and lobby blockchain compliance with state regulations. This will put the system at per with the OTC marketplace.  The matter has already been forwarded to SEC. The Winklevoss twins have outlined a set of proposals to form a regulatory body for cryptocurrency exchanges to prevent hacks and insider trading.
• According to documents made public by the U.S. Securities and Exchange Commission, two Bitcoin ETF proposals are being considered. The main point to be discussed and debated is whether Pro Shares can list two exchange traded funds on NYSE Arca.
• Other large cryptocurrencies are still evolving as well. Ethereum and Ripple are set to undergo some significant changes that can attract additional, non-blockchain investors.
• Positive news related to the introduction of derivatives or legalisation of bitcoin and other cryptocurrencies. Banning is just a temporary measure until government will figure out how to deal with emerging market. Therefore, sooner or later majority of governments will recognize Bitcoin.
• General practice of “HODL” is much more profitable than doing the same in traditional stock market. According to Thomas Lee, head of research at Fundstrat Global Advisor, if an investor didn't hold stocks through the 10 best days for the S&P 500 each year, the annualized return would drop to 5.4 percent from 9.2 percent. Similarly, "the reason 'buy and hold' (or HODL) makes sense for BTC is that a handful of days each year account for the bulk of gains for BTC," Lee said. "For instance, in 2017, a total of 12 days represent the full-year return of BTC."

It’s quite possible that Bitcoin can become a digital version of gold. Now, before we move further I want to specify that Bitcoin won’t replace gold and it won’t become its competitor - we are likely to see Bitcoin as an additional alternative, nothing more. Gold has a lot of similarities with Bitcoin - gold doesn't pay a dividends, while approximately 58-61% of the world's gold supply is devoted to an actual industrial or commercial use. Hence, large quantities of gold are held in vaults as a long-term store of value and a hedge against inflation and global turmoil.

Perhaps, Bitcoin can become very similar to this due to the massive “HODL” movement, where people believe that Bitcoin is going to grow, and it’s a good long-term store of wealth. The more people believe in it, the more it will be a good long-term store of wealth.

As conclusion I would like to express my believe that Bitcoin will eventually recover during this or upcoming year, and in the nearest 7-18 month will move over $20,000 USD price line. Volatile market means that prices can significantly increase and decrease. Being on the wrong side of the business cycle can hurt you, but it won't last forever - It's always darkest before the dawn

Article is written and prepared by Vladyslav Antonov: entrepreneur, investor and ICO analyst.

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The above references an opinion and is for information purposes only. It is not intended to be investment advice. Cryptocurrencies and other Initial Coin Offerings is highly risky and speculative, and this article is not a financial recommendation.