What Drives Bitcoin’s Price?

First of all, I am not a financial expert and my trading plan can be summed up with misspelled word: HODL.

After participating in the cryptocurrency markets for five years, which means checking the price of Bitcoin more times a day than is strictly healthy and reading lots of price analyses and price predictions, I think that gives me a unique insight.

As Bitcoin has once more plummeted to a yearly low, and with predictions about what is going to happen next include a further plunge to 3,000 (or more) to even the death of Bitcoin, to predictions that Bitcoin will reach 10,000 or 25,000 by the end of the year or 250,000 by 2022 – it’s clear that no one has a clear handle on this thing. And in truth, I don’t think anyone has a clear handle on stock markets either.

So what is driving the price of Bitcoin?

Fundamentals

For all claims that Bitcoin has no inherent value, it really does. Bitcoin’s value comes out of the fact that it is a value transfer system (also known as money) that works without trusted intermediaries (also known as governments and banks) across the entire world. Whether that means that Bitcoin will ever be able to be used to buy everyone’s coffee or only for only for large transfers of value as a kind of reserve for other currencies (crypto or fiat) is not clear to me. In either case, though, whether Bitcoin becomes the money we all use every day, or whether it’s only a reserve that underwrites other currencies is immaterial in terms of the direction the price Bitcoin will have to take to fulfill that purpose: up.

Of course, I’m hopeful that it will be Bitcoin itself that most people will use, and the development and growth of the Lightning Network, even though it is currently still really only in a testing phase, gives me great hope and I wait for the release of truly user-friendly, fully-functional Lightning wallets eagerly.

The long trend of Bitcoin is very positive and its potential has hardly been tapped yet. The best is yet to come.

Bubbles and Busts

At different points in the development of Bitcoin, it’s going through bubbles, and then frequently immediately experiencing a bust. Sometimes these are triggered by events in the news, and sometimes there’s no identifiable reason for the movement. All you can say is that once a trend gains momentum, it tends to keep going for a while. The news cycle will pick up this and if it’s a bubble people will start jumping in which further drives the trend. Eventually the fear-of-missing-out (FOMO) will hit a fevered peak and the price will hit such heights that it’s difficult to understand why people are buying as the crash is clearly imminent.

For the crashes, the same kind of things is at play with the added effect that all those people who bought in for the first time near the all time high will feel completely burned by the crash. They sell for a loss, call Bitcoin a pyramid scam, and contribute the rash of negative press and bad news that inevitably pummels Bitcoin for months. This is where we are right now. It can take a long time for people’s emotions to settle down and for Bitcoin to regain its gradual climb based on fundamentals.

News

The vast majority of mainstream media press about Bitcoin is either FOMO or FUD (negative news creating fear, uncertainty, and doubt. These stories frequently lean into the current trend, trumpeting this great technology when it’s on an upswing and claiming it’s dead when it’s crashing.

Often enough, though, news of hacks, scams, government regulations etc. will cause the market to crash. We have recently seen two exchange hacks in South Korea, a strong hint of regulation in India, a crackdown on exchanges in Japan, and all of these have sent Bitcoin into spins after what seemed soft recoveries from recent downturns.

Basically, Bitcoin has seemed to want to recover, but keeps getting hit by these stores preventing from making incremental advances.

Traders

Traders are the people staring at charts trying to figure out which direction and how far that squiggly line will go by using ‘Technical Analysis.’ Though ‘technical’ is in the name, I’m pretty well convinced that all this is an exercise in mass psychology. The support levels, resistance levels, Fibonacci retracements, harmonic patters, head and shoulder formatiosn, etc. etc. etc. are nothing more than traders trying to predict how people are going to react so they can get in or out before everyone else.

When we’re in a boom or bust trend, TA probably has real value, though in the grand scheme, at that point the trend will be so obvious that most people could spot it. Most of the rest of the time the traders are really playing game against themselves. They use these highly-specific strategies to manipulate or benefit from the patterns the traders themselves are creating. The rest of us are just along for the ride with no good way to know what’s going to happen next.

Though I am a price-checking addict, and have been for years, the best advice I have for this is a) don’t trade unless you really know what you’re doing as it’s a lot like playing poker in a high-stakes game against world champions. Most of the time, if you don’t know who the mark is at the table, it’s you; and the best way to win is not to play. This is why my strategy is mostly to HODL.

Whales

This is a class of investors, usually traders, but not always. You have the Tim Drapers and Winklevoss twins who hold lots of Bitcoin and who are on the record as not selling until this thing plays itself out or it is no longer necessary to sell. You have MT Gox trustee who is in charge of a large amount of bitcoins which theoretically will be returned to those that had them on the platform when it burst into flames in 2014. He has proved himself dangerous as he has recently sold large sums of Bitcoins without warning sending the market spiraling. You have the miners who are earning their bitcoins and need to sell them at times to buy equipment or electricity. You have the hackers who need a way of getting away with their ill-gotten gains.

Mostly high-Bitcoin-net-worth individuals are just playing a waiting or trading game, but because they have so many Bitcoins, and because the market is still so small relative to the larger stock market, and even relative to companies like Apple and Amazon, that if they decide to make a large move, it can have a huge impact. And their moves are impossible to predict because they are the actions of individuals or institutions acting for reasons we can’t see or know.

Conclusion

The biggest thing that I’ve learned about Bitcoin’s price movements is that it’s exhausting to watch. I have high-hopes for Bitcoin, and it’s taking longer than I hoped for it to achieve its potential. Nothing has happened, though, not the rash of FUD, forks, altcoins, scammy ICOs or any of the rest of it, has caused me to doubt the fundamental value of Bitcoin.

As I sit here reading TA pronouncements saying that Bitcoin may fall further to 3,000 or below (predictions I have no doubt are possible), I also know that Bitcoin will in the long run keep going and keep going up.