1. Price correction brought bitcoin to a healthy valuation
In 2017 we saw one of the strongest rallies in Bitcoin history and it peaked at the current all time high of approximately $19500 per bitcoin before it made the inevitable correction. In the recent months the price has dropped down as much as 70 %. More importantly the value has, once again, settled to higher levels than before the rally.
This is part of the cyclical nature of the growth of bitcoin and often these corrections provide the best buying opportunities. One of my favorite indicators is the so called “Mayer multiple” which is based on the relation of the current price and the 200-day average price. Right now we are well below the 200-day average price, giving us a Mayer multiple of 0.67. Generally speaking a high multiple can be an indication of a bubble and a low multiple an indication of undervaluation.
2. Bitcoin has proven it is reliable and that it can scale
Many legacy systems and also other cryptocurrencies have constant reliability issues. Bank systems can go down, causing issues with online banking and payment cards. Other cryptocurrencies have had serious reliability and security issues in recent years, including Ethereum and newer ones such as EOS. They are not really reliable.
Bitcoin has proven to be extremely reliable. The last time Bitcoin had a major outage was in 2013, when the blockchain was unreliable for a few hours due to incompatible versions of the software. It was fixed swiftly and now for over 5 years Bitcoin has been operational and reliable 24/7/365.
In December 2017 Bitcoin did have an issue which was not an outage but it caused frustration for many users. Making a speedy bitcoin transaction, in dollar terms, cost as much as $20 at the peak, when Bitcoin transactions were in unprecedented demand. And if you accident or on purpose paid less, it could lead to massive delays.
As I and many others expected, this proved to be a temporary issue and at the time of writing the fees to send a bitcoin transaction are in BTC terms lower than at any time in the last 7 years, and quite cheap even in dollar terms (a few cents per transaction).
Why have the fees dropped to levels not seen in years? Due to multiple reasons. One of course is the lower demand for bitcoin transactions compared to late 2017. But it is not the only reason. Various scaling upgrades have been implemented Bitcoin users and companies that have added significant capacity. There are basically three main scaling upgrades that have an effect on the network right now:
- Segregated Witness (SegWit) can theoretically provide over 100 % of extra capacity for the network. Currently approximately 40 % of the network is making SegWit based transactions, which already provides a significant capacity boost.
- Transaction batching, which can provide an even larger boost than SegWit, has been implemented more and more Bitcoin services recently. This means that instead of sending each payment in a separate transaction, exchanges and other services will wait until they have a larger amount of payments and batch them into a single transaction. This saves a huge amount of space and more efficiency is expected in the future as there are still certain large exchanges that do not execute batching.
- Lightning network, which potentially could have a massive effect on capacity, is already being used for real bitcoin payments. At this moment the effect of Lightning on the congestion and fees of the network is minimal but it is expected to have a larger effect in the future. One real life example of how Lightning is being used is Satoshi’s Place, where people paint pixels using Lightning. At its peak there was over 1 000 transactions made per day in this service with very low fees and they did not cause almost any congestion on the Bitcoin blockchain.
In summary, it has been proven that Bitcoin is highly reliable and that it can scale, which is a very positive fundamental value.
3. Lightning strikes
The great Bitcoin scaling war started in 2015 and caused a lot of drama, stress and doubt in the Bitcoin community. In 2017 the war ended with the activation of the Segregated Witness upgrade and the creation of Bcash (Bitcoin Cash). This simultaneously set in stone the direction Bitcoin development will take in the future and offered an alternative for those who support a different direction.
Now the dark clouds are gone and the sky is clear. Bitcoin is moving forward and one of the greatest developments in Bitcoin history is the lightning network. To this date Bitcoin has been great at being digital gold but with the addition of lightning, it can also become a payment system.
Lightning network is a technology that enables anyone to send bitcoins instantly with very low fees and it simultaneously retains the basic ideology of bitcoin, meaning that no third party takes custody of your coins. In the lightning network users create so called payment channels and payments are routed through this network of channels. Lightning also enables the swapping of different coins directly through the lightning network, as long as the coin supports lightning. Currently this is possible between Bitcoin and Litecoin.
The use of Lightning with real bitcoins started in early 2018 and at this moment the network has 2700 nodes, 9000 channels with a total capacity of 63 BTC. It is most suitable for small payments ranging from $0.001 to $50 and it can already be used in some online stores and services. I expect the use of Lightning to continue to grow rapidly and it could potentially change not only Bitcoin, but online commerce in general.
4. Crypto is becoming mainstream with Bitcoin in the forefront
During 2017 cryptocurrency became, for the first time, a mainstream phenomenon. This varies from continent to continent and country to country, but now a very large amount of people have at least heard about Bitcoin. In countries such as South Korea a majority of young people have invested in cryptocurrencies.
The interest in it is somewhat cyclical but the trend is clear. Ever more people are becoming interested in it. I expect this trend to continue. But what about Bitcoin versus other cryptocurrencies? Nowadays Bitcoin is not the only game in town, there are others. Why Bitcoin?
Bitcoin has many advantages compared to other cryptocurrencies and some of these points I discuss in more detail in other sections of this article.
To start, it is the most recognizable cryptocurrency, the one with most visibility. It is also the oldest and most reliable cryptocurrency. It has the most real usage of any cryptocurrency. It is the mother of all coins in the crypto exchange market, which means that most other cryptocurrencies are mainly traded to and from bitcoin.
The events of the great scaling debate have proven it to be truly decentralized unlike most other cryptocurrencies which means it can realistically provide censorship resistance, the key advantage of crypto. It has a fixed, set in stone deflationary monetary policy which many other coins lack. And most recently, it has technically realistic and workable scaling solutions, which can support large amount of usage without sacrificing decentralization.
This does not mean that it is not a good idea financially to also buy some other cryptocurrencies. They can be a good speculative bet and some coins can potentially offer new use cases that Bitcoin has nothing to do with. But the thought of something becoming “the next Bitcoin” is currently not realistic. The advantages that Bitcoin has are very hard to overcome and coins that want to directly compete are going to have a difficult time.
It is also important to understand that the interest in other cryptocurrencies is spread between many different coins competing for attention. Some like Ethereum, some Ripple, some EOS, some IOTA, some Litecoin, some Monero, and so on. This makes it difficult for a single coin to grab attention away from Bitcoin to itself effectively.
Bitcoin remains the clearly largest cryptocurrency with a current market share of approximately 43 %. I personally believe there is room for growth in its market share as there is still way too much invested in coins that are not going to amount to anything.
5. Securities will bring in institutional money and the masses
We are entering a new era where bitcoin exchanges are becoming more regulated and simultaneously we are seeing the arrival of bitcoin based securities. This started with GBTC Bitcoin Investment Trust and then came the ETN Bitcoin Tracker One (Nasdaq) and most recently we saw a launch of the bitcoin futures at CME and CBOE.
In the next phase we will be seeing many types of cryptocurrency funds pop up all around the world, including ETFs. This not only allows large institutional investors to enter the market, it also opens the gates for the masses. Many regular investors use traditional banks and investment services to invest and as these securities become available to buy at their go-to provider, it is a complete game changer.
It is important to note that even though there will likely be securities based also on other cryptocurrencies than Bitcoin, it is in this area where Bitcoin has a clear advantage. It is the oldest, most reliable coin with the largest market capitalization and the least volatility. Bitcoin based securities are most likely to get approved regulators and thus become part of institutional investments and offerings.
I expect Bitcoin to have a much larger market share in securities compared to its overall market share in the direct token exchange, and as more and more securities are created, I expect it to increase Bitcoin’s market share in the direct token exchange as well.
6. Global economy is on the brink of collapse
The economic situation is unstable all over the world and it is is in my opinion on the brink of collapse. Bitcoin is a fairly non-correlative asset and will likely benefit from the potential collapse of the traditional economy. This means that it is smart to diversify some funds into bitcoin.
In 2008 the economy collapsed due to unsustainable debt structures but what many people don’t understand is that debt has only increased since. It is quite possible that in the next few years we will see an even larger collapse. Recently the political situation in many areas around the world has become more volatile and the arrival of trade wars between large countries is not going to help the situation.
In that type of situation traditional safe havens such as physical gold will likely rise in value but this time bitcoin will play a significant role. Bitcoin as a currency is similar to gold, it is scarce and can’t be created from thin air. However the features of Bitcoin are more advanced as it can be moved effortlessly to anywhere in the world. And importantly, thanks to the great rally of 2017, now people actually know about bitcoin. It is becoming mainstream and this will be a key factor in how much bitcoin matters in the next collapse of the traditional economy.
Weak national currencies are already a great source of demand for bitcoin as are political restrictions set to stop people from taking their money outside a country. Due to these issues people want to exchange increasing amounts of traditional currency into bitcoin.
The worse the traditional economy gets, the better it is for bitcoin. This is why it makes sense for anyone to diversify a portion of their investment portfolio or savings budget into bitcoin.
7. The battle against censorship resistant money continues
The trend to get rid of cash all over the world is getting ever stronger. It is no longer just about developed countries, it is now getting more and more common everywhere as various means of digital payments from payment cards, online banking, mobile payments, NFC payments etc are taking the world storm.
However, from a privacy perspective cash is an important payment method and traditional digital payments methods leave a lot to be desired in that sense. Bitcoin is digital cash and any attempts to remove actual cash will increase the demand of bitcoin.
The digital revolution of money brings significant enhancements in ease of use but it causes problems for privacy. We are in danger of moving into a police state where everything people do can be monitored. In the era of digital money and payments Bitcoin is an alternative that retains some features of cash.
It is almost certain that all attempts to remove cash will increase the demand of cryptocurrencies. However I must note that it is in this area that Bitcoin does have some faults. As its blockchain is highly transparent, it requires expertise and care to retain some privacy. Other cryptocurrencies such as Monero are more privacy advanced as they can have a system that is designed for maximum anonymity from the get go.
Bitcoin has the advantage of being better known, more widely used and it has much better liquidity, less volatility and is the most reliable cryptocurrency. But the fact of the matter is privacy is important and even though from a technical sense Bitcoin wallets and transactions are censorship resistant, if it is not private then the state can potentially intervene in real life (as in, put people to jail).
Overall I would say that regardless of the lack of advanced privacy features Bitcoin is more cash-like than traditional digital payments. It is more resistant to higher powers intervening than is the case with centralized digital payments. However its privacy features must be improved or we will be seeing cryptocurrencies such as Monero grabbing more market share from Bitcoin. This, to me personally, is one of the few (if not the only) fundamental reasons to diversify ones crypto portfolio.
Finally it is good to mention that Bitcoin is getting improvements in the privacy department. Future protocol upgrades such as Schnorr signatures will improve privacy, and payments made using the lightning network are generally considered significantly more private than regular Bitcoin transactions.
8. The halvening reminds the world of the power of Bitcoin
Bitcoin has a predictable money supply which started with approximately 7200 bitcoins being created each day. Now we have lived through two halvenings, the last one in 2016, and nowadays there are only approximately 1800 bitcoins created each day.
The current estimate for the next halvening is May 2020, which is still 22 months off. However it is key to understand that as we are living through these halvenings, the power of Bitcoin is becoming evident for the whole world. Everyone is truly starting to understand that this is how Bitcoin’s monetary policy works and that it is reliable and effectively set in stone.
The implications of this are ever higher as time passes and more halvenings are experienced. The realization that bitcoin is a real competitor to central bank money starts to set and the true revolution of money is ever closer. It also means these events will be priced in before the event itself and more effectively each time. As people already know about it and have taken it into account.
Not everyone yet understands. It is your advantage to understand it now, before everyone else does. After 2020 it is possible that not many in the world lack this understanding any longer and as we eventually move to the adoption of the late majority, the train has truly left the station. Even though it may be difficult to believe, the train has not left the station yet.
9. From a rally to an even bigger rally?
There is currently a debate going on about the nature of the recent price decline. Are we in a prolonged bear market or merely in a correction which will launch an even bigger rally?
I do not claim to know the answer but I do have an opinion which leans on the latter possibility. To me this resembles the situation in 2013 when we first had a price increase from $13 to $260 in the spring, and then a correction to well below $100. And then in late 2013 we saw the massive rise from below $100 to $1200.
If we repeat this particular cycle, we could be seeing a BTC value in excess of $50000 later this year. Why do I think this particular outcome is more likely than a prolonged bear market? I will now outline some of the main reasons why:
- I have seen and felt the hype levels of all the rallies in the past. In 2011, I was there. In 2013, I was there. In 2017, I was there. Even though we clearly became overpriced in late 2017, I did not feel we have reached the levels of hype, relatively speaking, required to generate a true long term peak and a prolonged bear market.
- The Mayer multiple that is based on the 200-day average price did not go anywhere near the levels it reached in 2011 and 2013 when we experienced the previous megarallies.
- The fundamental development of the Bitcoin ecosystem is stronger than ever. We have solved the scaling debate and the protocol is being developed actively. We have a functional new payment layer (Lightning) in use. We have Bitcoin securities popping up everywhere at an accelerating rate. While Bitcoin is becoming more and more mainstream, the outlook for the traditional economy looks grim.
Even though I think it is more likely we are not in a prolonged bear market, it is of course possible that we are. Even in this case it is smart to start looking for buying opportunities, as we are already 68 % below the historical all-time high at the time of writing. Even when painting a scenario based on the worst bear markets of the past, we are not that far from the bottom.
10. Market sentiment is low and that is the time to be bold
There is a classic saying Warren Buffett that says “be fearful when others are greedy and greedy when others are fearful” and I fully agree with this statement. At the time of writing the market sentiment in Bitcoin and cryptocurrencies in general is fairly low and many investors have lost hope or are quite bearish about the current outlook. When one starts seeing comments such as “Bitcoin will never go over $10k”, it is generally a good idea to start considering buying in.
Bitcoin’s valuation has repeated certain market cycles since the beginning and while the size and timeframe of these cycles tend to differ, the same principles apply. We have times of massive bull markets with hype and growth, then we have corrections and bear markets, and then we have periods of relative stability and consolidation, and then the cycle repeats itself.
The big question is, are we in a prolonged bear market or is this more like a pause between two massive growth periods, similar to what happened in 2013? As explained in the previous chapter, I tend to think of the latter as more likely, meaning that I expect a large growth period later this year.
Regardless of the length of the bear market, I believe it is a good time to consider buying when the sentiment is low, when we are well below the historical all-time high and when the current price is well below the 200-day average price. As of this moment, this is where we are at.