“In investing, what is comfortable is rarely profitable.” — Robert Arnott
Amid the first correction in 2018, many are wondering what will happen to the Cryptocurrency World in the following months. Bitcoin for example, plunged about 25% year-to-date, while it’s value almost halved since it’s all time high in December, being $10.900 (Bitstamp) at the time of writing.
What are the major risks that will affect the Crypto market in 2018?
The crackdown in South Korea and China, which are considered to be among the largest Crypto markets in the world, and regulation in USA and EU will greatly affect the price of Bitcoin throughout the 2018, while Altcoins are no exception. We must not exclude potential Crypto exchange hacks as well as Bitcoin Futures now trading on CBOE and CME. These futures might have actually caused the last correction. Institutional investors “pumped” the price of Bitcoin to almost $20,000 in December, while they have been “dumping” it as the January futures expire these days. However, futures are not necessary bad for the market, but that is a whole another topic. Moreover, as we have seen in the past, the fear of ban and regulation of Crypto trading caused major corrections on the market. For instance, a Chinese ban of ICOs in summer of 2017 caused a 40% plunge, the largest correction in the past year.
“Every once in a while, the market does something so stupid it takes your breath away.” — Jim Cramer
Is Crypto market in a bubble?
It might be, but in fact no one really knows. The Cryptocurrency marketcap is around $500 billion at the time of writing (source: Coinmarketcap), while amid both, the dot-com bubble in 2000 and the housing market crash in 2007-09, US household wealth losses only, accumulated for about $6 trillion, while the actual size of the markets was actually much bigger.
Another interesting fact is the comparison of the size of various markets. In the Q4 of 2017 the Global money supply accounted for $90.4 trillion, world’s gold was valued at about $7.7 trillion, while the size of Global stock markets was roughly $73 trillion. Global Real Estate market was valued at $217 trillion, while the size of Derivatives market (CBOE and CME are a part of this market as well) was estimated to be around $544 trillion, however, no one really knows the true size of it. Therefore, despite it’s huge returns in the last year Crpyto market is, at the current size of $0.5 trillion, still a drop in the ocean compared to all other markets (source: Marketwatch).
What could be the main drivers of Crypto market in 2018?
As I stated earlier, Futures on Bitcoin listed on CBOE and CME make it easier for institutional investors both to go “long” and to go “short” on Bitcoin. Apart from that, a wider adoption of Cryptocurrencies and consequently larger cash inflows are expected in the markets this year. Blockchain is called the “new internet” and it is becoming more and more applicable for the real issues, more and more companies arise every day, while existing companies search for the ways to adopt the new technology. ICOs are currently more or less banned in China, US and some other countries, however, we might see a shift in legislature that could bring additional funds through the ICOs in the Crypto world. Last but not least important, for the last month, most of the major Crypto exchanges are being blocked due to increased demand. People are taking loans, new users are waiting in lines while exchanges are desperately trying to employ new people in order to respond to the market demand. We are talking about hundreds of thousands people waiting in the line, while exchanges are only able to approve a few thousand new users per day. Everyone is in fact, trying to catch the Crypto-train.
We could find a myriad other reasons to support the growth or to declare the doomsday of the Crypto world. The time will determine the true value of the market, as it always did in the past.
OK, great! But where is the $100,000 you were talking about?
Here we are.
For those math-savvy people reading this, I used Monte-Carlo method for the Bitcoin price simulation, while I used Geometric Brownian Motion (GMB) to specify the behaviour of the Bitcoin price. GMB is a statistical method that is widely used in the forecasting of stock prices, as well. For the base, I used a 3-year history of Bitcoin prices in order to generate 10,000 simulations. I won’t go into more details here.
Simulations are plotted below. Dark blue presents 2.5 percentile while the light blue presents 97.5 percentile of the closing prices throughout the 2018. The area in between presents the 95% of potential closing prices on 1st of January 2019.
The median is estimated at $23.800. We can, in fact, be 95% sure that the price of Bitcoin in the beginning of the 2019 will be somewhere between $4,650 and $127,250. If the 50% chance is enough for us, the range narrows to $13,600 - $42,600. The other way to interpret the latter result is that we have a 75% chance that the price of Bitcoin will be somewhere above $13,600 by the end of 2018.
Will it hit $100,000? It might, but it’s not very likely. Due to volatility the price range estimation is very wide, however it will mostly likely start the 2019 higher than it did this year. The median is estimated at more than twice of the current price, which is a positive signal as well.
“The four most dangerous words in investing are: “this time it’s different.”” — Sir John Templeton
Stay safe, use stop-loss orders and don’t risk any money you can’t afford to lose.
Disclaimer: This is not an investment advice.
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