Bitcoin Prices and how to know when You’re Right!
How much is a bitcoin worth? What is the difference between cost and worth?
The new year has just begun and the bitcoin price/USD is trading slightly up after decreasing 85% in about a year. The most recent low took place mid-December (almost exactly a year since the all-time-high).
If you’re reading this around the time of publication, then the dramatic price swings haven’t scared you away. Perhaps you’re a bitcoin maximalist and believe it will replace fiat currency or maybe you’re a seasoned stock trader who sees dollar signs in the volatility.
Want to know the price
Whether you’re new to bitcoin or have been HODLing since 2012, if you have some or want some, you probably want to know where the price is going. And I’m sure you can appreciate that there are differences between bitcoin and the more traditional financial markets.
For the purpose of this discussion, I will be talking about bitcoin, however many aspects of the discussion would be applicable to other cryprocurrencies, crypto-assets or tokens as well.
Trust in trustless technology
When you buy bitcoin, you’re buying a balance, or portion of a balance that was generated by a computer solving an algorithm. No trusted third party is required to validate your transactions (despite the fact that the most common method of obtaining bitcoin may be through an exchange). You have to have trust that others will continue to value that balance; hopefully, they value it more in the future than when you bought it.
Traditional markets are tied to the economy in ways that bitcoin has yet to reach. These markets are responsible for the global economy as it is today and our infrastructure and businesses are financed through these modern financial mechanisms. Everyday government and business decisions rely on predictions and forecasts of numerous metrics related to the economy and financial markets.
In the following paragraphs, I will touch on various traditional methods of analysis, and discuss their applicability in evaluating bitcoin.
But first, let me tell you I am not an expert in technical analysis or assessing traditional markets. In fact, I only started learning about it in the past few years, by way of bitcoin. So, if I’ve misunderstood terms, or erred in my logic, I encourage you to leave me feedback.
Additionally, you should not consider this as financial advice as I am not a financial advisor.
Let me introduce Sam. Sam is a fictional friend of mine who has been looking into bitcoin for while now and wants to buy some. He asks:
“How do I know that I will make money?”
Well, you don’t. Nobody knows what the future holds, but we can educate ourselves and make predictions. To understand the potential of bitcoin you have to step outside the box.
But first, let’s talk about investment horizon.
Do you need the money you’re buying bitcoin with? Is it part of your retirement savings? Or is it extra play money that you think you’d like to experiment with. It comes down to what your resources are, what your goals are and what your risk tolerance is…
Make a plan
There are numerous positions Sam could have. He may have access to lots of cash but also need that cash to buy a house in a year. This would necessitate a different plan than if he had a couple thousand bucks that he’s willing to lose on a long shot that it provides a good return. The minimum barebones plan should include a timescale and an expectation of return.
Speaking of returns brings up the price. Typically the price, in USD/BTC, remains the primary metric of importance to most bitcoin investors I’ve encountered. How much can he buy? How much will he make? Will it become valueless?
The price is a function of the market and there are hundreds of bitcoin markets. Coinmarketcap lists 400 exchanges. These markets operate globally, 24/7, connecting buyers and sellers of bitcoin for USD or one of many other fiat and cryptocurrencies. There are also, alternative means of obtaining bitcoin through bitcoin ATMs, local meetups or online listings where you can meet someone in person and purchase bitcoin with cash. Additionally, in the past couple of years, several decentralized exchanges have been developed where you can exchange different types of cryptocurrencies for one another.
When to buy
Back to Sam… If he had $1000 to invest and the best price at the time is $4000, he could get 0.25 bitcoin. But bitcoin is volatile, it changes an average of 2.7% a day. Sam might ask:
“What if the price drops 10% the day after I buy?”
Well, that is quite possible. Daily fluctuations of 10% happen quite regularly. Look at your investment horizon. If you want to buy and sell bitcoin to make money off the short term price volatility you’re going to need to know more about technical analysis than I can offer you, and even at that, it may not help you.
Dollar cost averaging
If you believe in the technology’s potential you might want to consider doing regular purchasing. Instead of saving up $1000 and buying at the “right time”, you could buy $100 worth once a month. Using this method you can buy more when prices are low and buy less when prices are high. Additionally, you can re-adjust regularly as the technology develops and your opinion of the investment changes.
Short-Term Price Predictions
Technical analysis uses historical data to predict where the price will go in the short term. Professional traders seem to either love it or hate it. Some rely fully on it, others say it should only be used as a marketplace barometer.
A technical analyst may look at the price chart over a month, and say that the different daily peaks and valleys resemble a shape that represents a common trend, and that this trend indicates a high probability the price will increase in the short term. The problem, I think, is the size and maturity of the marketplace. I don’t believe the bitcoin market is of adequate size, or with enough diverse players to respond rationally.
Often times when there is good bitcoin news, the price goes down. Conversely, there are times when there is bad bitcoin news and the price goes up.
“Why is bitcoin irrational”
It is still early days within the development of a new technology which could potentially have large impacts on financial markets. Given, the large potential upside, speculation plays a major role.
Bitcoin goes through cyclical patterns of growth, accumulation, and sell-offs.
There are some bitcoin wallets which hold large balances… whales. They are represented by early investors, mining operations, institutional investors and hardware manufacturers. 3% of addresses hold over 95% of all unspent transactions. These whales can and do influence the market being that it is immature and mostly unregulated.
Market Capitalization (Market Cap.)
Market Cap and daily trading volumes are familiar to any seasoned investor. However, due to the nature of bitcoin, it doesn’t quite translate apples to apples. For those unfamiliar, market cap is a measure of the total value of an asset by multiplying unit price by the number of units. It’s just one way to measure how much something, such as a company, is worth.
Bitcoin currently has a market cap of about $63 billion USD.
“That sounds like a lot of money, but it’s kinda hard to visualise that much”
Starbucks is currently valued at about $79 Billion, and GM at $53 billion; Bitcoin is in between those two in terms of market cap. The two largest companies by market cap are Amazon.com Inc and Microsoft at $818 and $806 billion. So, according to market cap, bitcoin is less than 8% as valuable as Amazon or Microsoft.
Bitcoin isn’t a company
Bitcoin is the first implementation of a new technology. A technology that, at a minimum, could put a dent in several markets. It isn’t accurately portrayed by market cap for a couple of reasons. One being that market cap doesn’t include any mechanisms for dilution in the case of a contentious hard fork.
As an example, bitcoin cash (BCH) and bitcoin SV (BSV) forked last November. When this happened instead of there being 17 million BCH at an approximate market cap of just under 8 billion, there were 17 million BCH and 17 million BSV for a combined total close to 20 million.
An additional problem with market cap is that it uses the total number of available shares or coins as part of the calculation. The problem is that there are countless lost keys which contain bitcoin that will never be retrieved. If the lost coins were not included in the equation, the market cap would be larger.
“The price goes up and down with lots of volatility and traditional methods of price analysis don’t tell us the whole story…”
“So when should I buy”
That’s not for me to tell you. Gain an understanding of what the technology can do. If you want to risk a lot, be prepared to lose a lot. But make a plan with a timeline. If you’ve made money at the end of the timeline, you were right. If not, hopefully, you’ve learned something.