In the 2008 bear market for bitcoins, one of the main questions was "When will the price of bitcoins go up?" Investors who entered the bitcoin market in 2010 were already familiar with the market cycle of bitcoin.
Bitcoin has revised its price, falling more than 80% twice in its history and 70% from December 2017 to June 2018. It is worth noting that in the last fiscal year, the price of bitcoin has also risen by nearly 50%. It's hard to believe that it was commonplace to buy Bitcoin for less than $1,000 just 18 months ago.
If you start with $1, bitcoin has doubled 16 times in its history. Having said that, many of the investors who bought Bitcoins at the peak of the 2017 cycle were asking the same question - when will I see a return? Well, I don't think bitcoin will become parabolic in 2018.
Reasons for bearish in 2018
There are 8 main reasons why 2018 will not be a year of bull market return.
Historical cycle
In 2015, I met with very few people who were interested in the Bitcoin or other encrypted currencies, and I think that when we look back at 2018, that's what happens - when prices fall, very few people are interested in a particular asset class. In 2015, only 2 million 300 thousand new wallets were launched, compared with more than 9 million in 2017. Activating the wallet is a good, but imperfect measure, but it can be used to interpret the number of new investors entering the sector.
If we take the bear market for 2014-2015 years as an example, the bear market will last for about 19 months. Prices fell to nearly 80% of the bottom. By definition, we've been in a bear market for seven to nine months, and I don't think this cycle will be very different over the next few months.
Hash value
In the past 7 months, the hash value of mining has increased two times. This is the amount of computation that bitcoin networks need to protect per second. According to Tuur Demeester, this means that a large number of new and more efficient mining platforms have been launched.
If you're a miner without these devices - your profitability has dropped dramatically, that means you need to sell more bitcoins to pay for it. We can estimate that about 1,800 bitcoins (12.5 bitcoins per piece, 144 bitcoins per day) are mined every day, so there is a lot of selling pressure from the miners because they are forced to sell bitcoins instead of holding them to pay the cost.
Profits on each transaction of Bitcoin mining, in dollar terms, have fallen 92.6% since its December high.
ETF's delay
A popular view is that the regulated bitcoin ETF will bring a lot of money to the asset class, which will raise prices. The catalyst is often compared with the first gold ETF, which was approved in 2004 and the price of gold rose 350 in the following year. The SEC will postpone its decision on the ETF proposal until the end of September this week, putting high hopes on Van Eck SolidX commodities to support the Bitcoin ETF.
The ETFs approval process gives the SEC a total of 240 days after filing an application with the Federal Registry to make a decision (including the time they are allowed to extend it), so the SEC has a reason to use all the time available to it. More time means more information and research about the underlying spot market can be exposed, and the SEC can make stronger and wiser decisions. The next extension is expected in late September, and the final date for a decision on the proposal is February 18, 2009. Therefore, do not expect ETF to push the next bull market in 2018.
Metcalf's law
Metcalf's law describes the network effect in technology. The network value of Metcalfe (NVM) ratio is derived from this theory. Between 2015 and 2018, the NVM ratio showed that the price of Bitcoin was undervalued, comparing it to the price of chain activities, but this changed in 2018 - prices began to catch up with the normal NVM ratio.
Now, this ratio shows that the current market value of bitcoin is too high when considering activities. This ratio is calculated by calculating the network value (market value). High NVT ratios may herald high growth or unsustainable bubbles, but ultimately they simply indicate that the network is overvalued compared to the money it transmits.
The NVT ratio rose from 65 to 193 in 2018.
Retail interest
Retail interest declined in 2018 as prices plummeted. Professional analysts, including myself, were bombarded by friends who asked if Bitcoin would make them rich in 2017. These retail investors worry that they miss the next big thing and are willing to buy Bitcoin at any price because it is rising exponentially. The three indicators I use to measure retail interest are business income, Google search and Wikipedia search. Compared with 2017, the bitcoin revenue decreased by 50%. Visits to the Bitcoin Wikipedia page have dropped from a peak of nearly 100,000 people a day to a trough of nearly 10,000.
Clarity of regulation
In 2018, we had some clear regulations on regulation, that is, the Securities and Exchange Commission's William Hinman outlined that Bitcoin is not a security. If the Bitcoin bull market is to be the medium of global trading and value reserves, more regulatory certainty is needed at the global level, not just in the United States.
Last week, when the Winklevoss ETF was once again denied, a major reason was that the underlying spot market for the asset was being manipulated. Governments around the world need to decide how to treat Bitcoin in the long run, and the underlying spot market needs to be more mature (to ensure there is no manipulation) to allow more money to flow into the Bitcoin market. These two variables will take time.
In the long run, I am still optimistic about bitcoin.
Bullish long-term prospects
There are 6 long-term catalysts and closely related theories that show that bitcoin has a positive effect:
RMB
Most analysts are convinced that the best use of Bitcoin at the moment is cross-border payments - more specifically, I think Bitcoin is best suited for capital flight, because in this case, authoritarian government restrictions on Bitcoin exist. This makes some people think that the price of bitcoin is negatively related to the price of RMB. In 2018, the renminbi has been falling against the dollar, which may indicate that if purchasing power continues to decline, it may trigger capital outflows to Bitcoin.
The leading position of bitcoin
One of my persuasive points is that in the ICO boom of 2017, overvaluation of projects that are not worth investing in was a catalyst for the bear market of 2018. Before we realize the next bull market cycle, this needs to flow out of these over-capitalized projects and back into Bitcoin. This means that the dominance of Bitcoin needs to be raised to a certain level, which I believe is well above 60%. The dominance of bitcoin rose in 2018, rising from 33% to 51%.
Block rewards halved
By May 2020, the returns from mining bitcoin blocks will be reduced from 6.25 to 12.5btc per block. We can look at this problem from several angles: the profits of miners will be reduced or inflation will drop.
First of all, I think halving the block award is a positive sign because its precedent shows that it has had a positive impact on the price of the bitcoin. Second, I think mining companies will continue to become more efficient by May 2020 because of Moore's law, and I'm not too worried about their long-term profitability.
Approval of ETF
As discussed above, I don't think ETF will be approved in 2018, but I believe eventually a Bitcoin ETF will be approved. When it is approved, it will be easy for institutional funds to buy bitcoins, because there is no need to buy bitcoins from unregulated spot markets, and hosting solutions will be in place.
Personally, I think this is a better way to allocate capital than investing in bad debt or negative income bonds.
Clarity of regulation
I think the U.S. government, especially after Hester Pierce's SEC announcement, is willing to explore Bitcoin more and promote technological innovation. As I mentioned above, regulatory certainty, such as how Bitcoin is taxed globally, and how citizens buy it safely, will take time, but I think governments are willing to provide a framework for Bitcoin, directives and governments to coexist peacefully. As Bitcoin is now, I think the government likes to have a transparent block chain that monitors all transactions in the ivory tower. Remember, bitcoins are fake, not anonymous.
Future gold
"Bitcoin will one day replace all the world's gold" may be exaggerated, but it was one of the reasons I pulled out of the Bitcoin rabbit hole.
I think Bitcoin is a good complement to gold as a value reserve, because it has a higher value than gold: low storage costs, no capital controls, divisible, no counterparty risk, fixed supply. I think bitcoin is a supplement to gold.
A little-known fact is that more and more gold is discovered each year and added to the world's reserves. For simplicity, let us assume that all the gold value in the world is 7 trillion and 500 billion dollars. If only 10% of the wealth stored in gold is transferred to bitcoin, it is 750 billion dollars. In terms of market capitalization of US $750 billion, the value of each bitcoin will exceed US $35 thousand.
2018 may not be a year of bitcoin, but in the long run, I am optimistic about bitcoin.