Projecting the Price of Bitcoin

I’ve taken the liberty of preparing a projection of bitcoin’s price action going forward:

You see the primary dynamic is continued skepticism from the mainstream, which owns essentially no cryptocurrency and conventionally views bitcoin and its peers as fads, scams and bubbles that will soon pop as price crashes back to near-zero.

Skepticism is always a wise default position to start one’s inquiry, but if no knowledge is being acquired, skepticism quickly morphs into stubborn ignorance.

Bitcoin et al. are not the equivalent of Beanie Babies. Cryptocurrencies haveutility value. They facilitate international payments for goods and services.

The primary cryptocurrencies are not a scam. Advertising a flawless Beanie Baby and shipping a defective Beanie Baby is a scam. Advertising a mortgage-backed security as low-risk and delivering a guaranteed-to-default stew of toxic mortgages is a scam.

The primary cryptocurrencies (bitcoin, Ethereum and Dash) have transparent rules for emitting currency. The core characteristic of a scam is the asymmetry between what the seller knows (the product is garbage) and what the buyer knows (garsh, this mortgage-backed security is low-risk–look at the rating).

Both buyers and sellers of primary cryptocurrencies are in a WYSIWYG market: what you see is what you get. While a Beanie Baby scam might use cryptocurrencies as a means of exchange, this doesn’t make primary cryptocurrencies a scam, any more than using dollars to transact a scam makes the dollar itself a scam.

Bubbles occur when everyone and their sister is trading/buying into a “hot” market. Bubbles pop when the pool of greater fools willing and able to pay nose-bleed valuations runs dry. In other words, when everyone with the desire and means to buy in and has already bought in, there’s nobody left to buy in at a higher price (except for central banks, of course).

At that point, normal selling quickly pushes prices off the cliff as there is no longer a bid from buyers, only frantic sellers trying to cash in their winnings at the gambling hall.

While a few of my global correspondents own/use the primary cryptocurrencies, and a few speculate in the pool of hundreds of lesser cryptocurrencies, I know of only one friend/ relative /colleague / neighbor who owns cryptocurrency.

When only one of your circle of acquaintances, colleagues, friends, neighbors and extended family own an asset, there is no way that asset can be in a bubble, as the pool of potential buyers is thousands of times larger than the pool of present owners.

I discussed The Network Effect last year: The Network Effect, Jobs and Entrepreneurial Vitality (April 7, 2016):

The Network Effect is expressed mathematically in Metcalfe’s Law: the value of a communications network is proportional to the square of the number of connected devices/users of the system.

The Network Effect cannot be fully captured by Metcalfe’s Law, as the value of the network rises with the number of users in communication with others and with the synergies created by networks of users within the larger network, for example, ecosystems of suppliers and customers.

In other words, the Network Effect is not simply the value created by connected users; more importantly, it is the value created by the information and knowledge shared by users in sub-networks and in the entire network.

This is The Smith Corollary to Metcalfe’s Law: the value of the network is created not just by the number of connected devices/users but by the value of the information and knowledge shared by users in sub-networks and in the entire network.

In the context of the primary cryptocurrencies, the network effect (and The Smith Corollary to Metcalfe’s Law) is one core driver of valuation: the more individuals and organizations that start using cryptocurrencies, the higher the utility value and financial value of those networks (cryptocurrencies).

In other words, cryptocurrencies are not just stores of value and means of exchange–they are networks.

The true potential value of cryptocurrencies will not become visible until the global economy experiences a catastrophic collapse of debt and/or a major fiat currency. These events are already baked into the future, in my view; nothing can possibly alter the eventual collapse of the current debt/credit bubble and the fiat currencies that are being issued to inflate those bubbles.

The skeptics will continue declaring bitcoin a bubble that’s bound to pop at $3,000, $5,000, $10,000 and beyond. When the skeptics fall silent, the potential for a bubble will be in place.

When all the former skeptics start buying in at any price, just to preserve what’s left of their fast-melting purchasing power in other currencies, then we might see the beginning stages of a real bubble.

The wild card in cryptocurrencies is the role of Big Institutional Money. When hedge funds, insurance companies, corporations, investment banks, sovereign wealth funds etc. start adding bitcoin et al. as core institutional holdings, the price may well surprise all but the most giddy prognosticators.

The Network Effect can become geometric/exponential very quickly. It’s something to ponder while researching the subject with a healthy skepticism.

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  • Zartan

    Bitcoin is a reflection of an over-priced market. Everything is inflated and government has bailed out the natural consequences. Anyone with a Brain knows Stocks and Housing are Stratosphere! So, gold and bitcoin will increase with the insanity.

    Cash is still superior to bitcoin, as both are inherently worthless, but cash does not leave a trail of IP numbers and other code that can be used to identify YOU and YOUR purchase. Government is backing bitcoin, for illegal trade tracking, and they want to eliminate cash. However, too many government operations, which are illegal, require CASH. CASH will always be KING.

    • Tony

      “Government is backing bitcoin”

      Yes. The propaganda pasted everywhere is that cryptos are not banker controlled, an escape from the current system. What a load of rubbish. With one piece of legislation they could outlaw it, but they do not. With several pieces they could regulate it but they do not. The huge price increase as well as the “escape form bankers” tag are there to temp people into a cashless currency, precisely what they want, which is allowed (controlled) by the same bankers and their puppet governments.

      They might be able to inflate it and con people, but the end will not benefit most people. It’s a scam.

  • artguerrilla

    three minor problems:
    1. how to avoid balkanization of the inertnet, don’t they all depend on free communication of the blockchains, etc ? ? ?
    2. similarly, some gummint -prob US- says this or that crypto is ‘bad’, and this or that crypto is ‘good’, wattchewgonnadowillis ? ? ?
    3. lastly, just how will those bitcoins be redeemed when the power goes out ? ? ?

    • Mabelwbernard

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      On tuesday I got a great new Land Rover Range Rover from having earned $8752 this last four weeks.. Its the most-financialy rewarding I’ve had.. It sounds unbelievable but you wont forgive yourself if you don’t check it
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  • Zartan

    Anyone that does not know the market is completely rigged, by now, should not be in the Market. The idiots in charge could not have made it any easier to spot. 100-million ( or more) out of the labor force, but unemployment is 4-percent? Where are all the Math Teachers? How do they get away with such BS?

    They have been pumping Trillions into plunge protection ( should be illegal) and QE programs because the economy is completely dead. Oil is down because there is no DEMAND. Commodities ( copper/alum) are being bought by contract to head-fake markets. I have long suspected the USG of Shorting Gold and Silver, Read the NDAA act.

    All the Reports are Government Reports … People, “Wake up and Smell the Coffee.” They sold your soul to China ( slave labor) and now your markets are being inflated ( with your money); while your housing is being foreclosed on. This has all been planned.

    You will not fight … And, there is nothing a BULLY likes more than a wimp who will not fight. You`re gonna get Another, America!

  • jadan

    Bitcoin is an expression of Smith’s believe in a free market and it makes no sense. Markets are created by governments. Without government, there is no market; there is a free-for-all in which the largest players exploit the smaller. Bitcoin is not owned by Smith’s peer group, but there are also few owners of Warren Buffet’s Berkshire stock for the same reason. The buy in cost is just too high for bitcoin and the risks high. Smith seems to think bitcoin is not a “fiat” money, but he fails to understand that without the fiat, ie, the law, there is no true money and without government, there is no law. Cryptocurrencies are simply vehicles for the “network” to gamble with. An algorithm is no substitute for government. The problem with government is the simple fact that it is not democratic and the problem with money issued by our government is that it is not actually issued by our government, but by a private corporation called the Federal Reserve, which is owned by an elite minority of wealthy people, referred to as the 1%. The problem is not government but the failure of people to take control of government and operate it in the public interest. This means money created by the people’s treasury, not a private club presided over by a diminutive Jew.

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