Bitcoin: The Calm Before The Storm
Bitcoin (BTC-USD) has been remarkably stable in recent months. In fact, for over two months now Bitcoin has traded in an incredibly narrow range of around $6,000 – $6,800. There doesn’t appear to be much news worthy of moving prices right now. So, Bitcoin remains extremely calm, for now.
Bitcoin 1-Year Chart
Nevertheless, despite the tame atmosphere surrounding Bitcoin for the time being, this is predominantly likely just the calm before the storm, a storm that is likely to lift Bitcoin prices substantially higher over the next several years.
This is not the first-time Bitcoin has seen calm waters. We’ve seen similar periods of modest volatility, and humble price swings. Primarily, similar low volatility phenomenon have occurred in the very late stages of Bitcoin bear markets (the opposite of vertical moves and wild price swings we see at the height of Bitcoin bull markets). Everyone seemingly loses interest, volume dries up, news flow quiets down, and then, when you least expect it, the next Bitcoin bull market begins.
I expect the current “quiet period” to lead to a new Bitcoin bull market soon. So, what will be the catalyst to light a match beneath Bitcoin prices? There are several developments that should begin to improve sentiment, and start to move prices substantially higher going forward.
Bitcoin at $250,000 in 4 years?
Billionaire investor Tim Draper recently reiterated his $250,000 Bitcoin price target by 2022. Draper believes that many of us will be using cryptocurrencies to buy coffee and other everyday things 5 years from now instead of implementing fiats everywhere. Naturally, Draper is not alone in his bullish analysis on Bitcoin. Fundstrat’s Tom Lee, and many other prominent Wall St and non-Wall St figures believe Bitcoin will be worth much more in the future.
Tom Lee even predicted that Bitcoin would be at $25K by the end of this year. Well, that does not appear very likely now, nevertheless, Bitcoin could be worth much more several years from now. The problem with Bitcoin price targets is that they are extremely difficult to pin down, but due to the fundamental factors surrounding Bitcoin the overall trajectory should remain higher long-term.
Jamie Dimon Does Not Care Much for Bitcoin
On the flipside of the bull argument many Wall St insiders like JPMorgan’s (JPM) CEO Jamie Dimon, and even revered investor Warren Buffet have become avid skeptics of Bitcoin. In fact, in a recent interview Mr. Dimon shared just how much he does not care for Bitcoin.
I never changed what I said, I just regret having said it. I didn’t want to be the spokesman against Bitcoin. I don’t really give a sh*t, that’s the point. Blockchainis real, it’s technology, but Bitcoin is not the same as a fiat currency.
Great insight from Jamie right there, which may accurately represent the viewpoint of many longtime banking and Wall St insiders. So, why should Mr. Dimon care about Bitcoin, or like it or dislike it at all?
Well, Mr. Dimon is the head of one of the wealthiest and most powerful banking institutions in the world. Incidentally, JPMorgan, like every other major bank in the U.S. owns part of the Federal Reserve through stock. Additionally, member banks like JPMorgan get to assign 6 of the 9 board members at every regional Federal Reserve Bank.
Some readers may think the Federal Reserve is part of the U.S. government but it is not. It is sanctioned by the U.S. Congress through the Federal Reserve Act, but is ultimately a private enterprise owned by member banks like JPMorgan, Citi (C), Bank of America (BAC) and others. Therefore, it is logical to presume that the same entities who own majority stakes in major U.S. banking institutions by default own and through the appointment of most directors control the Federal Reserve.
It seems convenient that a private organization like the Fed has a monopoly on dollar creation. The organization creates all the dollars “it sees fit”, then lends out these dollars to member banks like JPMorgan at a very low rate, the member banks then create all the credit they want through fractional reserve banking (typically at a rate of 10-1, credit – reserve), and then lend it to the population, small businesses, etc. at a substantially higher interest rate.
This is the system that we live in, the fiat reality. Who do you think a system such as this favors and benefits, the people making the rules, or the general public?
So, of course Jamie Dimon does not care much for Bitcoin. In fact, he should probably fear and despise it, because Bitcoin and cryptocurrencies in general represent a real alternative and thus a true threat to the current status quo fiat finical order.
The Bitcoin/blockchain system essentially assumes control over currency from big banks like JPMorgan, and returns the power over currency into the hands of the population, essentially leveling the financial field for all participants in the market. This takes the potential for predatory manipulation, devaluation, inflation, and other unpleasant factors essentially out of the financial equation.
Don’t Mind the 2,000 Plus Cryptocurrencies
Critics often point to the fact that there are now over 2,000 cryptocurrencies in circulation. Some skeptics claim that the continuous creation of new digital assets delegitimizes the entire space, and will ultimately render most or all cryptocurrencies close to worthless.
However, the cryptocurrency complex has maintained a relatively stable market cap of roughly $200 billion for months now, despite the creation of new coins. This implies that new coins coming online may enjoy very limited success going forward, and the prominent coins of today will likely turn out to be the widely-used coins of tomorrow.
As the segment matures barriers to entry will become higher as there are a number of dominant cryptocurrencies that are likely to retain their leading market positions indefinitely. Aside from specifically designed coins to handle certain functions like Ripple (XRP-USD) Ethereum (ETH-USD) and others, prominent transactional coins like Bitcoin Cash (BCH-USD), Litecoin (LTC-USD), and others will very likely retain extremely high portions of the transactional market.
This suggests that while these coins will increase in value substantially over time, newer coins coming online with similar functions will likely remain largely irrelevant due to the recognition and widespread use of current digital assets, and higher barriers to entry going forward.
Still Waiting on a True Bitcoin ETF
The SEC continues to stall on a Bitcoin ETF. In September, the ruling on 9 Bitcoin ETFs got postponed, but a decision is expected in the near future. The introduction of Bitcoin ETFs will likely open floodgates into the Bitcoin market, and will propel Bitcoin into the main stream as far as conventional investible assets are concerned. This will very likely help ignite the next bull phase in the bitcoin era.
Right now, investors have very limited access to Bitcoin. They can either buy Bitcoin directly through a cryptocurrency exchange, they can trade Bitcoin futures contracts, or they can buy the Grayscale Bitcoin Investment Trust (OTCQX:GBTC), none of which are ideal options for the vast majority of retail and institutional investors. Much easier access will be granted via multiple mainstream Bitcoin ETFs.
Furthermore, even if the SEC postpones its decision again or does not approve an ETF at this time, the path is already set for Bitcoin to be accepted into the investment world on a mass scale. Bitcoin futures already exist and trade freely on the biggest exchanges in the U.S. Furthermore, Bitcoin has been officially classified as a commodity, is receiving increased regulation, and the next logical step is to introduce ETFs. Also, there are many prominent companies now pushing for Bitcoin backed ETFs to be approved.
Institutions Likely to Move In Soon
One very atypical factor about the Bitcoin phenomenon is the extremely limited role traditional investment houses and Wall St in general has played in it. Aside from shorting Bitcoin from the highs, it appears that institutional investors have made very little money in Bitcoin, thus far. This is precisely why the next wave of capital capable of taking Bitcoin substantially higher will likely come from big institutional investors. This could include the creation of Bitcoin backed ETF’s and other asset classes, infrastructure projects, development and funding of supporting companies, direct investment, and so on.
Opportunities in the digital asset space for investment companies are essentially limitless, and this is precisely why Goldman Sachs (GS), and others are starting to venture into the crypto space. I expect that when the next Bitcoin bull market arrives, Wall St will not be sitting it out this time. There is simply too much money to be made, and the space has reached scale capable of attracting many billions in institutional dollars. So, expect prices to go especially high next time around due to excess speculation from the guys on Wall St.
Another factor that is likely to propel prices higher is the continuously improving functionality of digital assets. Whether it’s the Lightning Network, transactional coins like Dash (DASH-USD), ZCash (ZEC-USD) and others, big multinational corporations starting to accept Bitcoin, or other developments, it appears that the trend is leading to one outcome, much wider use of digital assets in the future.
The Lightning Network is optimizing Bitcoin’s functionality, alt coins provide safer, or more anonymous modes of conducting commerce, and more and more companies are openly beginning to accept Bitcoin seemingly every day. Moreover, Bitcoin returns the control over money back to the people where it ultimately belongs. I agree with Mr. Draper, 5 years from now we are likely to be using Bitcoin and alt coins much more readily than most people expect, and because of this Bitcoin’s price is likely to be much higher in 2022.
The Bottom Line: The Calm Before The Storm
Bitcoin’s price is extremely calm right now, but we have seen such calm periods before. Most notably, Bitcoin’s price action flattened out in 2012 before a bull run, in 2013, prior to an ascend, and throughout periods in 2015, and 2016, prior to the most recent bull market. One thing that all these calm periods have in common is that they occurred after substantial declines had taken place, and they all preceded significant rallies. I don’t expect this time to be any different.
Bitcoin: Long-Term Logarithmic Chart
Moreover, there are plenty of potential catalysts capable of sparking an explosive rally in Bitcoin as well as in other digital assets. The approval of Bitcoin backed ETFs, increased institutional participation, improved functionality, as well as other bullish elements will likely play an instrumental role in driving the next Bitcoin wave significantly higher. Prices in this wave should go substantially higher from current levels, and could eclipse the prior top of roughly $20K by several factors. So, essentially I am looking for Bitcoin to be at around $50,000 – $100,000 in 3 – 5 years.
Risks Do Exist
Detrimental Government Regulation
In my view, the number one 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 is no guarantee that the LN will become widely adopted, even over time.
Therefore, there is 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 for fraud cases. In an industry that is 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 over 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 is always the simple risk of loss of interest amongst the masses. There is 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.
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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.