Bitcoin 2021: Scam or cycle? The 4th wave is happening
Bitcoin is back on the news which means that the price is going crazy for months already which means that you are wondering: why is the price of bitcoin going up? I am not going to explain here how bitcoin works, there are already too many videos about that on YouTube. I am going to rather discuss what the current price action means in the context of Bitcoin’s past and possible future.
But Alejandro, why does Bitcoin have value in the first place if it is just a piece of code, thin air? Well Bitcoin works in the same way as money, in the sense that their value exist only in our imagination! The only reason money works is because we ALL agree that it has value. The day we don’t agree anymore that some pieces of green paper have value, the value will go down. Right?
Quoting Yuval Noah’s Sapiens
“Money is the most universal and most efficient system of mutual trust ever devised.”
Indeed, money represents a system of trust between you and the government, and between you and other consumers. As long as people trust each other and the Fed, everything is fine. The Aztecs, for example, used cocoa beans as currency! Why? Because chocolate is awesome, that’s why. They did have gold, but who cares about the shiny metal when you have cocoa beans!
So it does not matter if we are talking about a piece of paper, a piece of metal, cocoa beans or a mathematical abstraction beautifully designed and implemented by Satoshi Nakamoto, at the end of the day it is a system of trust. A system that allows us to exchange goods and services. A Kg of cocoa beans has an equivalent price in USD, gold and BTC as long as we agree on that.
One of the differences between normal money and bitcoin, however, is that money is green paper and green paper can be fabricated in the magic green paper factory (aka the Fed) whereas bitcoin -because of the way it is designed- has a finite limit! There will ever be only 21 M bitcoins. That’s it, no more, no less. Well actually maybe less since thousands or even millions are thought to be LOST in dead wallets (people that forgot their password, lost their computer or even forgot that they opened a Bitcoin wallet back in 2012 to buy… eh… pizza). So let’s do the math here: If we all want a piece of Bitcoin because we all agree that it has value, AND there is only a finite amount, the price can only go up in the long term. Again, as long as we agree that it has value but so far that seems to be the case.
A play in three charts
We all have a friend that always says “But Alejandro, bitcoin is a bubble, remember the crash from 2017? Lots of people lost their money. Bitcoin is a scam” That kind of statement is usually informed from the TV or the WSJ where they show and “analyze” charts like this one:
This is how Morningstar, Yahoo Finance, Financial Times, Robinhood and many other platforms display the price history of Bitcoin. From this chart, It seems that for many years Bitcoin was doing nothing — presumably because it is a scam — — and only around 2016 people started buying bitcoin out of nowhere for no reason at all. This buying pressure created a bubble that eventually burst at the end of 2017. Time at which people lost 80% of their money. Classic scam. Right. There is something clearly wrong with that narrative. Let’s talk about two basic lessons on data visualization. First, we need to show data that goes back to 2010, when BTC started. Robinhood, Google, yahoo Finance etc. only show the price of Bitcoin from 2015 as if it magically appeared one day with a price of $327.
Second, and most importantly: The scale of the chart is wrong. Because of the massive rally on 2017, the price history before that is obscured. When we have such extreme values in the data we need to use log scale. When we combine the longer price history with log scaling we get this chart:
That looks extremely different. Now it is very clear that the price of bitcoin has been on a constant rally since its inception in 2010. It was trading at $10 around May 2011, it took then 2 years to reached $100 (that’s a 1000% increase in 2 years), and later in 2013 it was trading at $1000 dollars for the first time ever. Moreover, we can clearly see 3 waves when the price touched the upper yellow line, reaching a critical level and crashing later. For example, after the peak of $1000 in 2013, it took almost 3 years for the price to reach that level again (talk about bag holders!). Importantly, even after crashing, the price of Bitcoin was still higher than before the wave started! For all three waves this is true.
Traders of the Stock market find patters on the price charts and use them as a guide to know when to enter or exit a trade. Some of those patterns are pretty much lines on top of the stock price charts, representing summary statistics of the data, from which traders then make up “rules”. For example: “If the price touches the 50 day moving average, but it is above the 200 day moving average AND the RSI statistic is less than 40: enter the position”. Importantly, these “rules” or strategies (aka technical analysis) do work to some extent precisely because we are all drawing the same lines, and expecting the same patterns! So when the stock price reaches our imaginary lines, we all buy the stock and the price goes up from there. Therefore, patterns on price charts work as self-fulfilling prophecies, because we make them happen.
When we put Bitcoin on perspective (using the log axis), the 2017 peak and the current rally seem to be part of a consistent pattern that goes all the way to the inception of bitcoin! The yellow lines perfectly fit the price history, and the red lines indicate when Bitcoin breakouts from the previous high. It seems that Bitcoin traders are looking at those lines, because as soon as the price hits critical levels, things happen.
So why is Bitcoin doing this? Is this a conspiracy from the Illuminati? Is it perhaps Skynet taking control of the global economy? Actually, the pattern seems to correlate with the halving of Bitcoin mining. Every 4 years, the reward for mining new bitcoin is halved, such that miners receive 50% less Bitcoin for every transaction they verify. We can see that the cycles in the price action of Bitcoin correlate with the halving cycles. This means, that the behavior we see is to some extent programmed. People interested on Bitcoin are closely looking to all these variables before deciding when to start buying or selling Bitcoin, thus when the price hits critical levels (either high or low), the prophecies start to self-realize.
One more thing to consider is that back in 2017 most of the wave was fueled by retail investors like you and me. The interest in bitcoin as shown by Google trends implies that in 2017 a lot of people on the street wanted Bitcoin! However, financial institutions, funds, billionaires, Wall Street, and other members of the “smart money” community were not as interested. This time, however, they are on board. The Banks, Square, PayPal, Wall Street, Cathie Wood, they are bullish on Bitcoin, they were finally convinced, converted!
Conclusion
So, what does this all mean? The 4th wave of bitcoin price will be fueled by financial institutions, investors, Wall Street, as well as retail investors. If the chart is correct, the target price for the fourth wave is around 100k. Yes, 100k. Is that crazy? No. Yes. I mean, look at the chart! Several people are talking about $100k Bitcoin for a while now. So, do you trust the pattern? Do you believe in decentralized, programmable, instantaneous peer-to-peer monetary transactions that do not depend on a banking account? A middle man? A monthly fee? With no borders? For everyone? Mathematically designed and hack-proof? If so, my friend, you are a bitcoin believer and bitcoin believers buy bitcoin. In 300 years, will the humans of the future look back and think of Bitcoin in the same way we now think of cocoa beans? Possibly… but in the meantime, I’ll drink my chocolate, Aztec style.
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