Hey folks, how’s it hanging? As price has been moving sideways for the past few months, I decided to do an exercise and wonder what variables play a massive role in price changes. Not only that but make a random prediction of Bitcoin’s price at…
Hey folks, how’s it hanging?
As price has been moving sideways for the past few months, I decided to do an exercise and wonder what variables play a massive role in price changes. Not only that but make a random prediction of Bitcoin’s price at the end of 2018.
My strategy is simple: to analyze the three vectors I consider the most important and see if there is a convergence towards the same point.
First, we choose random coordinates in time, so that our analysis actually works.
This is, whenever you bought bitcoin that would be your starting point.
If you haven’t, what the hell are you waiting for?
As with any game, there are always two possibilities; a binary sequence for happiness. You either win or lose.
In other terms:
–this article shouldn’t be taken as financial advisement as it represents my personal opinion and views. I have savings invested in cryptocurrency so take whatever I write with a grain of salt. Do not invest what you cannot afford to lose and always read as much as possible about a project before investing. Never forget: with great power, comes great responsibility. Being your own bank means you’re always responsible for your own money—
First things first: just because we’re about to go down a mathematical rabbit hole, where numbers seem to give a false sense of certainty, do not get tempted to think you are absolutely sure.
Past performance doesn’t indicate future performance. Never, ever, ever.
TA is a great tool to actually improve your understanding of how markets behave, but it cannot, by itself, give you any kind of assurances. This is, you might believe you have enough understanding of price movements to actually predict its behavior, but at the same time so that a few win, many must lose.
The more you trade the less likely your chances of survival are.
Don’t get me wrong, I’m all for trading; if you’re good at it, patient enough and eager to spend hours around manuals and books, then you might have a chance.
Truth is, most traders lose. That’s just how things go.
If you still want in, there are some tools that might help in your quest for glory.
The Monte Carlo simulation is one. Basically, we assume that the future behaviour of the price of an asset will be similar to its past behaviour, and we generate a lot of random versions of that future, called random walks, similar to the past. That’s done taking random samples from the past and stacking them together to build each one of those random walks.
What immediately catches my eye is that the number of simulations landing on the area below 10k is much lower than the ones landing above.
What does it tell us?
If you believe in simulations, statistics and that price history matters, then it means you can expect the price of bitcoin to rise, at least, above 10k.
More, however, what if you consider what should be the likely normal distribution for price?
Think like this: how many occurrences happen for each price level?
By applying some distribution techniques we confirm our previous suspicions: the likelihood of bitcoin’s price to increase past 10k is much higher than the opposite.
What the above also shows is the most probable price for bitcoin on the 31st of December 2018 is…
That’s right, lads. According to this one statistical analysis we’re going to the moon!
Jokes aside, I honestly think it’s a great tool to understand future behaviour, although I also agree past performance doesn’t influence future performance. But because bitcoin is cyclical, open, transparent and very easy to manipulate, it becomes a safe haven for speculation.
And what drives price speculation?
A key vertical for making successful predictions is understanding market sentiment. Not only that, but you need to have a grasp on different markets, as money moves around a lot.
Before we go too deep into trend analysis, do you care more about macro-trends or about the reason behind events?
The supply of money tells us an interesting story. See what happened after 2008. To keep the engine running, there was a unanimous decision to just print more money, sell it cheaper and hope that would give the economy a nice boost.
Did it work?
If you look at the overall goal, yes; but what if we look closely, was there any actual value created?
There seems to be a huge fallacy with the above Keynesian logic. Economic activity by itself doesn’t tell you anything. People could be trading the same bitcoin back and forth for a dollar a billion times and that would count in the economic activity statistics as a billion dollars of activity. The aggregate numbers simply don’t mean very much because they have at best a very weak correlation with the actual value added.
Just because there’s more money, it doesn’t mean that money is going into something productive. More, however, you expect the more money is printed today, the less value it will hold tomorrow.
What do you think people do when there’s high inflation?
When inflation runs out of control, holding real rates, or interest rates minus inflation in check, does gold tend to benefit significantly? When holding cash becomes a problem, because it’s devaluing quickly, it makes sense people look for different sources of value storage.
You can reason there are many great traditional units of value, but why not bitcoin?
This is when trend analysis comes into play.
The only way bitcoin can increase in value is if more people are willing to pay more fiat for a single bitcoin in the future, than what they pay now. Or is it?
If gold tells us anything is that higher interest rates drive down its price. Obviously, because there is less money in circulation and because your money now is worth more. It’s essentially cheaper to buy gold.
Because the value of bitcoin won’t likely go to zero, as there are many miners supporting key resistance levels – people who hold much bitcoin and simply won’t sell below a certain price level – we can make the assumption even if price drops exponentially (ie, 90%) someone, somewhere in the future, will eventually buy bitcoin increasing its price. As everything is cyclical, the most logical thing to do is to either participate more actively in the cryptocurrency market or to simply wait for a new wave of hope and belief, which always drives up the prices.
My personal view on the matter is that by forcing yourself to participate more actively, you get to increase your knowledge and sharpen your perception to correctly guess market sentiment.
We can ultimately conclude bitcoin prices increase as adoption increases, due to new people coming into the market.
What drives adoption then?
When we speak about adoption we tend to think technical issues are always the bottleneck.
For instance, if I say “transaction count” people go mad saying certain coin can process whatever number of transactions per second, or that the protocol will scale because it uses a completely ground-breaking, amazing, NEW consensus algorithm!
Bitcoin’s proof of work was an amazing achievement because it used well known spam-proof technology, proof-of-work, as well as a gossip protocol to reach consensus. Align those features with an incentive to secure the network and you have the recipe for bitcoin.
So, the real breakthrough has already been achieved. And guess what? It’s not the number of transactions per second that matter, nor the fact businesses need some sort of “private” blockchain; the ability to send money over the internet to anyone around the world, privately and securely, without a central party, that’s what really changed things. New cryptocurrencies are simply building upon that concept.
But from the hundreds of cryptocurrencies out there, how to pick a winner?
Which one will get massively adopted?
My opinion is that it’s not going to be technical flaws that will hold cryptocurrencies at bay.
Bitcoin could already be massively adopted. Remember: its main purpose is to be a store of value.
What we dream of is using cryptocurrencies for everything on a daily basis. The technology is there, just look at Stellar, Ripple or Nem which could potentially support a very high number of transactions, smart-contracts and privacy – perfect for businesses. But for some reasons adoption hasn’t spread as much as we would like.
When we ask what’s holding companies and people back from mass adoption, two other questions seem to arise.
I tend to hear security is really the number one concern, but I really don’t think it is. With so many hacks happening, if people in general cared, we would all have our bitcoin stored in cold wallets underground.
No, there has to be some other reason.
What I still don’t see are massively adopted applications which use cryptocurrency as a means of transferring value and converting value, in such an easy way no user would ever understand they’re using cryptocurrency.
That’s what’s missing.
If I had a wallet-app which allowed me to participate in any network, as a miner, staker, or by any other rewarding mechanics it might have, then my incentive would be to use that App, as I could transfer value, store value and gain value.
The key puzzle piece which is missing seems to be an interface a child could use, which also rewards participants.
To achieve that goal, we still need to create better technology and ways of governance. Only when we reach a level it becomes as easy as Paypal, we can ever expect bitcoin to reach 100k.
Could it happen, though?
By combining the three verticals of Statistics, Sentiment/Knowledge and Technology we can draw the following picture:
There are many exceptions that could go against my logic, although I honestly believe even if the drought lasted more than a year, it would eventually recover and fly past prior highs.
Don’t forget, everything is cyclical.
We just need the patience to wait and the good-sense to listen to the news.
When a new hype cycle arises, just ride with it.
Featured image from Shutterstock.
Last modified: January 24, 2020 11:04 PM UTC