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Bitcoin: I’m Surprised That You’re Surprised

Back in June, I wrote an article about the relationship between Unique Addresses and the Bitcoin (BTC-USD)(COIN)(OTCQX:GBTC) market cap. I said:

...the predicted market cap of Bitcoin on June 1 of 2018 is $21,993,572,103.22, compared with the actual Bitcoin market cap of $131,769,788,441, six and a half times higher than expected.

Source: Seeking Alpha - June 1, 2018

Then, on July 1st, 2018, I published this table of the Bitcoin Value Indicator input signals:

Indicator NameUnique AddressesHash PowerTotal Transactions
Predicted Market Cap$20,042,854,205$94,484,985,458$57,573,388,992
Actual / Predicted5.781.232.01
Metric SignalOverboughtOverboughtOverbought

Source: Bitcoin Value Indicator, July, 2018

As recent as the 1st of November, I said that the market was still overbought.

While the Bitcoin price may still have room on the downside, it's clear to me that this opportunity won't last long.

Source: Bitcoin Value Indicator, latest

What did I mean about the "opportunity not lasting" long? Well, many crypto investors are apparently completely shocked by the price action, and there have been reports of people simply throwing in the towel. I'm not going to post these comments here, but if you head over to Twitter or Reddit, you'll see what I'm talking about.

There will be some people who will simply walk away from the market, only to discover that it's still alive and well next year.

The market is driven by both psychology and fundamentals. The best time to buy is when the fundamentals look great but investor sentiment is the worst. Why? Because that's where the largest opportunity exists, when the perception of value and the generation of value are the greatest distance apart.

Bitcoin is no different in that regard, and that's why I've been talking about the underlying value this whole time. Recall that the value is in the network. The larger the network becomes, the more valuable Bitcoin will become, which will encourage more speculation on other cryptoassets, which grows the ecosystem, which leads to a speculative bubble.

Now, one thing about bubbles is that they generally only pop once. Bitcoin has popped three or four times already - it's almost predictable now. Bitcoin has market cycles, like I described here.

Of course, I wasn't the only one saying the cryptocurrency market had room on the downside, or that the bear market was not over. Here's Willy Woo on Twitter:

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The talking heads get it wrong again

I think we do ourselves a disservice when we only let people on TV who speculate about the price at the end of the year. Almost always, it's some ridiculously high figure like $25k, or even the modest $15k that a certain key figure graciously lowered the his year-end target to recently.

You can't trust the people on TV. Look to the fundamentals, look to the primary data, do the research yourself. Or, at the very least you should arm yourself with a variety of techniques to quantify this new asset class. I'll humbly suggest my own methods be present in your toolkit.

What happens next?

I'm so glad you asked. The price goes lower still, and eventually stabilizes.

Look, as I've been saying for some time now, Bitcoin only has two possible futures. In one, it collapses completely, and in the other it changes the world. I call this Bitcoin's Binary Future.

Before you ever think about investing (or speculating) on Bitcoin you need to understand that. Those two futures are the only possibilities.

Understanding the Predicted Values

You will note that the predicted values in the Bitcoin Value Indicator are not the price Bitcoin is actually going to be. Rather, they are the price (or market cap depending on the metric) around which the price oscillates in log scale. During a deep bear market, the price will be below the predicted value. During a speculative bubble, it will be several standard deviations above the predicted value.

To further illustrate this point, let's pretend this crash had happened 21 days ago, and see what the Bitcoin Value Indicator Chart would have looked like instead.

Observe that in the last bear market, the yellow line (Bitcoin's market cap) was below all three predictors. Right now we're below one, but still above the two other metrics. Translation: We are still not out of the woods.

Prepare yourself accordingly.

Conclusion

When you think in log scale, we have to think about the downside as well as the upside. The price action looks very dramatic in linear scale, but if we zoom out.. not so much.

Over the coming months, Bitcoin will be finding its new equilibrium and finding the floor. After that, prepare to be bored to death by several more months of the price action moving sideways. By then, I hope you have your positions, because unless there's a total system failure (which again, I admit is possible), we'll be starting on the next wave that's likely to play out in multiples of what we saw at the end of 2017, making that last run look like child's play (not the movie, like... actual kids playing).

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