bitcoin

Why Bitcoin’s Bear Market May Be Over And What You Can Expect Next – Seeking Alpha


Source: Coingape.com

Bitcoin: Why the Bear Market May be Over

Bitcoin (BTC-USD) has been in the midst of a tumultuous bear market for roughly a year now. The world’s best known digital asset topped out at about 19,500 late last year, and had declined by 84% to a low of $3,170 in recent days. However, since then Bitcoin has amassed an impressive rally, registering five consecutive up days and gaining 30% in the process.

Bitcoin 1-Year

Source: BitcoinCharts.com

Bitcoin is now trading around $4,000, and could be in the opening stages of its next bull market. It appears that the period of maximum negativity and pessimism concerning Bitcoin has passed, and the next bull cycle could elevate Bitcoin’s price to fresh, new all-time highs over the next several years.

Why the Bear Market May be Over

Bitcoin’s decline has been epic this year, as the digital currency gave up nearly 85% of its value. However, the declines seem so epic primarily because this is the first time a Bitcoin bear market has been in the spotlight in the mainstream media and the general public. The truth is that Bitcoin has been through several bull/bear cycles in which the digital asset had appreciated considerably, only to deflate by 80% – 90%.

Bitcoin Historic Data

If we look back on a long-term chart of Bitcoin’s price action, we see that Bitcoin has gone through three major up waves. The first one took Bitcoin’s price from about $2 – $200, or about 10,000%, the second wave took the price up from about $50 to roughly $1,200, or approximately 2,300%, and the third wave brought Bitcoin’s price from $200 all the way to over $19,500, or nearly 10,000%.

Now, each one of these waves has been followed by a substantial washout,or a bear market. After wave one, Bitcoin declined from about $200 to $50, or 75%, after wave two Bitcoin came down from about $1,200 to $200, or approximately 83%, and this most recent wave had been followed by a washout of approximately 84%.

Additionally, if we look at the chart patterns, they appear extremely similar in terms of declines following a bull market advance. In fact, the current bear market looks nearly identical to the 2014/2015 slump. In both cases the price gradually drips lower, and then a distinct, sharp washout period takes place right before the price rebounds, stabilizes, and then proceeds to move higher gradually.

We may be at that crucial point now, right after the price has washed out, rebounded, is in the process of stabilizing, and could proceed to move higher going forward.

Signs of a Bottom

The cryptocurrency market has been in severe panic mode lately, a phenomenon typically observed at or very near to significant market bottoms. While Bitcoin had declined by 84%, the entire cryptocurrency complex crashed by nearly 88% from a peak of about $828 billion to just $100 billion in recent days. Additionally, many major coins gave up more than 90% of their values during this savage decline.

Cryptocurrency Complex Market Cap

Source: CoinMarketCap.com.

For instance, Bitcoin Cash (BCH-USD) lost approximately 98% from peak to trough in this bear market. Litecoin (LTC-USD) crashed by 94%, Dash (DASH-USD) gave up 96%, and so on. This has been a real blood bath for many of the most prominent and promising coins, which signals now may be the time to buy.

Bitcoin Cash Since Inception

Some of you may be saying “96, 98%, time to buy? These things can go to zero, they’re worthless.” I disagree, and I will explain why in the next section.

Why Cryptocurrencies are Not Going Away

Time does not stand still, the current financial order has become extremely inefficient in certain regards, and digital currencies represent a real alternative to the status quo. This does not mean that cryptocurrencies will make fiat currencies obsolete next year, or even five to 10 years from now. No, this simply implies that digital currencies can supplement the current fiat system, and with time can continue to play an increasingly larger role in the increasingly digitized and decentralized global financial order.

After all, digital currencies are far more in tune with the perpetually advancements in technology. Cryptocurrencies know no borders, no boundaries, and are not subjected to traditional government, central bank, or corporate limitations. They represent a true form of currency of the people and for the people.

Therefore, it’s extremely unlikely that prominent market leading cryptocurrencies will simply cease to exist, or will go to zero. In fact, the opposite is likely to happen, and as time goes on, the underlying assets are likely to experience more demand as their functionality attributes improve coupled with increased global adoption.

Why You Should Not Doubt Bitcoin

There’s no shortage of negative press about Bitcoin these days. Just like so many analysts were “sure” the price was going to $100K when Bitcoin was at $20K, now the “analysts” are convinced the price could go much lower, or to zero, with Bitcoin at $3-4K. Some are calling for $2,500, some $1,800, some are saying $1,000, and some even $100. In other words, many market participants (or likely observers) are convinced a complete collapse may be in the cards.

This absolutely horrid tone in sentiment is another sign the bottom is likely either in or is very close. I’ve seen articles recently saying that Bitcoin is fundamentally worthless, and is essentially useless, one interesting read right here on SA. Moreover, these articles get plenty of readers and commenters who seemingly agree with this outlook.

The truth is that Bitcoin has come a long way, and along its journey Bitcoin has continuously experienced times of extremely high sentiment and periods of very low sentiment. Right now, we’re at a low, and this typically coincides with a bottom in the market.

Another factor to consider is that Bitcoin’s potential is essentially limitless, in terms of popularity, digital store of value, and as a global medium of exchange. In fact, despite the declines, and beneath the surface the Bitcoin revolution continues to gather pace.

Amongst the list of a growing number of global businesses that accept Bitcoin in some capacity are industry leaders like Microsoft, Bloomberg, Subway, Whole Foods, Expedia, DISH Network, Shopify, and many more. As Bitcoin’s next wave ensues more companies are likely to join the ranks, and with time, commercial juggernauts like Apple, Amazon, and others may also begin to accept Bitcoin as a legitimate form of payment method.

Source: 99Bitcoins.com

Additionally, advancements continue to be made in Bitcoin’s Lightning Network, an add-on protocol. The LN makes Bitcoin transactions incredibly cheap, lightning fast, and solves Bitcoin’s scale issues. The combination of continued adoption, coupled with continuous functional improvements the LN offers, could bring Bitcoin much more into the mainstream over the next several years. This phenomenon should increase Bitcoin’s popularity, improve sentiment, reinvigorate demand, and cause the price to rise substantially. However, there’s another element that is likely to contribute greatly in Bitcoin’s next bull run.

Institutions are Likely to Join the Party

One atypical factor surrounding Bitcoin and most other cryptocurrencies is the absence of significant institutional involvement. Unlike most other financial instruments, currencies and assets, Bitcoin was not created on Wall Street Bitcoin essentially burst on the scene out of nowhere and seemingly caught most institutional investors by surprise. Most did not see the digital asset revolution coming, and only made it to the party in time to short the latest move down. However, that does not mean institutions will be absent during Bitcoin’s next wave higher.

Along with increased regulation, recognition, functionality and popularity comes the opportunity to make a lot of money in the crypto space, and institutional investors are unlikely to sit this round out.

In fact, Bakkt’s physically backed Bitcoin futures are likely to be approved relatively soon according to sources. This is much different than the current non-physically backed futures contacts that are traded on the CME and the CBOE. Physically backed futures contracts are likely to increase demand and improve sentiment in Bitcoin. Furthermore, this is just another logical step in the direction to make Bitcoin a widespread and highly coveted store of value, investment, and trading vehicle.

Source: BitcoinExchangeGuide.com

Next, there could be the introduction of various Bitcoin ETFs/ETNs. There already are numerous petitions from leading ETF providers like VanEck, and others. In fact, the SEC recently reviewed nine such ETF proposals. Furthermore, just because the SEC has been slow in the Bitcoin ETF approval process and has not yet approved any ETFs does not mean that the organization will continue to deny petitions continuously. Many experts believe that 2019 will be the year the SEC comes around to approving Bitcoin ETFs.

Why Sentiment is Everything

Sentiment is essentially everything in the Bitcoin kingdom, and as Bitcoin’s price melted recently, sentiment has been atrocious. However, sentiment can switch on a dime, and when it does the price can go much higher quickly. Bitcoin is not dependent on cash flows or currency fluctuations as stocks, commodities and many other assets are.

Essentially, all that Bitcoin is dependent on is sentiment. As sentiment improves, demand goes up, and this drives the price higher. The fact that Bitcoin’s supply is capped at just 21 million can potentially exacerbate the supply/demand dynamic when sentiment rises and prices could appreciate much faster than expected.

Therefore, as Bitcoin’s adoption and functionality continue to improve, its popularity should increase. With increased popularity, sentiment and demand should improve due to institutional and retail interest. Ultimately, Bitcoin should go much higher as a result.

So, How High is Bitcoin Likely to Go?

As I mentioned earlier, the current downturn is roughly consistent with prior declines witnessed throughout Bitcoin’s history. Therefore, the next leg higher also may be roughly consistent with prior up moves in the Bitcoin market.

Since becoming a relatively popular investment/trading vehicle Bitcoin has gone through three primary waves higher. The first, from early 2012 to early 2013, took Bitcoin higher by about 10,000% in about one year. The second, from mid-2013 to late 2013, took Bitcoin up by about 2,300% in roughly six months. And the third, from about mid-2015 to late 2017, elevated Bitcoin’s price by approximately another 10,000% in about 2.5 years.

So, we see a clear trend that Bitcoin goes higher after each wave, and the longer up moves tend to deliver higher returns percentage wise. Also, we can see a trend that each subsequent peak is higher than the prior one by several fold. For instance, Bitcoin increased by around 28-fold from its first peak of about $7 to a price of roughly $200. Then Bitcoin increased by about six-fold to its next peak of $1,200, and then Bitcoin increased by about 16-fold to its latest peak of about $19,500.

This is a logical progression in price because in each subsequent wave higher more and more people around the globe learn about Bitcoin and want to own it. Another factor to consider is that still very few people own or use Bitcoin. It was recently estimated that there are only about 23.7 million Bitcoin addresses around the globe, which equates to only about 0.31% of the earth’s population. This implies that there could be multiple waves remaining in Bitcoin’s life cycle, and if Bitcoin continues to become more popular in each wave the price could potentially go much higher.

So, based on the historical evidence, and assuming Bitcoin’s popularity returns, and sentiment improves going forward, the next wave could send prices higher by several fold over the prior peak of $19,500. Also, if we apply a past appreciation standard of several thousand percent from the Bottom, assuming the $3,170 level was the bottom, Bitcoin could appreciate to about $73,000, applying the lower end 2,300% appreciation model.

The Bottom Line

Bitcoin has been in a tumultuous bear market for roughly a year now. However, and despite the incredibly negative sentiment, and the limitless fear mongering, history has shown us that declines such as these are a relatively normal phenomenon in the Bitcoin market. In fact, we’ve seen percentage declines such as these several times now, and each bear market has been followed by a raging bull run that takes prices substantially higher every time.

Moreover, it’s still extremely early in Bitcoin’s development cycle, and very few people (relative to the earth’s population) around the globe own or use Bitcoin right now. But this may change as more and more merchants are starting to accept Bitcoin and breakthroughs are occurring with its functionality attributes. Furthermore, it’s not only a question about more merchants accepting Bitcoin, but it’s the entire decentralized, limited supply concept, and Bitcoin’s almost seamless fit with technology and the internet that make Bitcoin so attractive going forward.

Sentiment is likely to shift, and with an improved wave of sentiment retail and institutional investors are likely to rush into Bitcoin once again. With this next wave of retail and institutional money demand should spike and Bitcoin’s price could go a lot higher. I expect the next wave to elevate Bitcoin’s price to around the $50,000 – $100,000 level, conservatively.

Risks do Exist

Detrimental Government Regulation

In my view, the No. 1 long-term threat Bitcoin faces is detrimental government regulation or an all-out Bitcoin ban. If major Bitcoin-friendly governments like the U.S., E.U., Japan, South Korea, and others follow the footsteps of China and essentially make Bitcoin use and trading illegal, it could have catastrophic consequences for Bitcoin’s price. Demand would likely plummet, and when demand for a commodity decreases, so does its price, drastically at times. This seems unlikely due to the progressive steps taken in the U.S., E.U. and other areas concerning Bitcoin, but the threat does exist, especially if Bitcoin ever starts to seriously challenge the current fiat financial status quo.

Continued Functionality Issues

Another risk factor is the concern that Bitcoin may never become a widely-used transactional currency due to its issues with speed and scale. Yes, the Lightning Network promises to solve many of the issues associated with speed, cost and scale, but there’s no guarantee that the LN will become widely adopted, even over time.

Therefore, there’s the risk that newer and more efficient digital currencies like LiteCoin, Bitcoin Cash and others will make Bitcoin somewhat obsolete as an actual medium of exchange for the masses.

Continued Security Breaches and Fraudulent Activity

Continued security breaches in the Bitcoin world concerning exchanges and individual wallets is a constant concern. If significant breaches continue, investors and users may start to lose confidence in the system and demand could decrease as a result.

Likewise, there are fraud cases. In an industry that’s relatively loosely regulated, substantial fraudulent activity is a persistent risk. Just like with security breaches, when people get ripped off, it reflects poorly on the entire industry and demand along with prices can suffer.

One Million and One Cryptocurrencies

Another concern is the seemingly endless supply of new cryptocurrencies. There are now more than 2,000 different cryptocurrencies listed on CoinMarketcap.com. The risk is that the market may become oversaturated with digital assets which could lead to a crash or to a devaluation of many digital assets, including Bitcoin.

Loss of Interest Amongst the Masses

There’s always the simple risk of loss of interest amongst the masses. There’s a chance that Bitcoin will forever remain a niche phenomenon, a novelty, as JPMorgan’s Jamie Dimon puts it. In this case, Bitcoin may not experience substantial demand, and the price would very likely cascade much lower over time.

Bitcoin is Not for Everyone

The bottom line is that Bitcoin is not for everyone. I view it as an investment for people with a relatively high risk tolerance, and even then, maybe only 5%-10% of a portfolio’s holdings should be allocated to digital assets.

Bitcoin is still a relatively new phenomenon, and no one truly knows exactly how it is going to play out over the long term. The truth is that 10 years from now, one Bitcoin could be worth $1 million, or it could be worthless, and given the number of uncertainties, neither outcome should really shock people.

Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with substantial risk to loss of principal. Please conduct your own research, consult a professional, and consider your investment decisions very carefully before putting any capital at risk.

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Disclosure: I am/we are long BTC-USD, BCH-USD, LTC-USD, XRP-USD, DASH-USD, ZEC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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