Since the start of 2017, Bitcoin prices have risen over 1,600 percent. Comparatively, the S&P 500 Index has only risen a meager 22 percent. While Bitcoin’s great ascent might be speculative in nature, investors can’t ignore its meteoric rise and increasing commercial adoption.
While 2017 has been an astonishing year for Bitcoin, many blockchain enthusiasts are calling for similar gains in 2018. According to Cullen Roche, founder of Orcam Financial Group, “forecasting what the price of bitcoin will be next year is impossible, but you can expect more people to buy their first bitcoins or fractions of thereof in the coming days, weeks, and months.”
For retail investors, the fear of missing out (FOMO) likely kicked in this year and will continue to drive prices higher in 2018. We can quasi-rationally expect this trend to continue as many retail investors will still be rushing to buy it without knowledge of future risks (potential downside). Historically, meteoric Bitcoin rises are coupled with a +40% fall in price (within 12 to 72 hours) that coincides with an exogenous shock (think technical issues, regulatory scrutiny, large hacks, and the like) – these shocks have happened 5 times since Bitcoin first launched. However, once the price bottoms-out during a downward trend, Bitcoin typically recovers quickly. And while history never repeats itself, it does rhyme, which means that Bitcoin may never “blow up.”
Beyond FOMO, one of the other driving forces behind Bitcoin’s rise this year was due to the astronomical fundraising levels of ICOs. Essentially, ICOs are a crowdfunding event for startups that are executed via cryptocurrencies. According to Coindesk, the all-time ICO fundraising volume has topped $3,775 billion – with the majority of volume raised in 2017 alone. One aspect of ICOs that participants tend to forget is that ICOs act as a “reserve” for cryptocurrencies. The funds raised via ICOs are not liquidated in a short time frame, rather it takes many months (likely years) to fully liquidate the majority of the proceeds. This means that the supply of circulating Bitcoin is lower than what’s currently estimated. Based on fundamental economics, if supply decreases while demand increases, then prices will rise. So, if ICO volume continues to increase in 2018 (or atleast match 2017 levels) then we can expect a certain level of price stability for Bitcoin.
For 2018, we can also expect demand to pick up from sophisticated investors as more Bitcoin futures are launched – potentially ETFs as well. CBOE Global Markets released a modestly successful futures exchange this month that experienced a 20 percent pop on its debut. Now, both CME and TD Ameritrade will be launching Bitcoin futures as well. This is significant as both companies are considerably larger than CBOE and will reach a more diverse base of investors, which could attract substantial inflows. Hopefully this progress will also open the door for larger institutional brokerages to allow their clients to clear bitcoin-related trades – a massive tailwind.
Overall, Bitcoin is a speculative asset with a very low current level of utility (although this is rapidly changing). Throughout 2018, gains in Bitcoin will be driven by FOMO, commercial adoption, increases in ICO volume, ETF exposure, and futures exposure.