Bitcoin (BTC)

Opinion: Bitcoin won’t make you rich any time soon. 335 Follow Apr 21 · 10 min read

“Simple Geometry!” — An Unknown Samurai

The speculative nature of Bitcoin (BTC) has been its lifeblood, the driving force behind its price. Early adopters, speculative traders, and the men and women willing to mine these coins have long been the deciders of Bitcoin’s price. For the majority of these people, many nights have been spent calculating the potential of this coin. As of publication, the price of Bitcoin is at ~$6,850, approximately $12,650 off its 2017 all-time high.

In the early history of Bitcoin, when only the most computer-savvy had interest in it, there was no correlation with any market. This is true as Bitcoin was more of a science project than a currency. This would change dramatically in 2017 when Bitcoin would announce its existence to the world through such a dramatic increase in value that very few could ignore the potential.

After the Bitcoin 2017 all-time high, it would fall again to more realistic values. This dramatic rise, and then correction, would be the birth cry of a new world currency. This would signal a threat to the dollar hegemony and immediately draw the attention of Wall Street traders eager for a low-risk, high-reward investment. Still, even after this event, Bitcoin was a currency only in hypothetical situations. Although demonstrating value, Bitcoin was not yet traded peer-to-peer in significant amounts. Relative to other government issued currencies, Bitcoin was hardly trading at all. Although the valuation was high, given the use cases provided, Bitcoin’s downfall would result from its lack of volume, a key metric in a currency’s health and potential.

For Bitcoin purists, measuring the value of Bitcoin in dollars is folly. The only measure of success they view is the amount of Bitcoin they have acquired. For the more short-term investors, the people who believe Bitcoin’s value is derived from its ability to produce dollars in their trading account, they only care for adoption in the sense that it might drive prices higher. This schism in thought between the two types of investors is a large factor in Bitcoin’s daily volatility. On one hand, we have investors eager to collect Bitcoins, and on the other hand, we have investors who are waiting for the perfect moment to exit their position in Bitcoin and post a profit to their account.

Within the community of Bitcoin speculators, a discussion is being held. This discussion speaks of Bitcoin’s correlation or causation with traditional markets. How would anyone be able to prove that Bitcoin correlates to traditional markets? Why would this be important? Rather than focusing on the trend or past price action, I would suggest that volume is the primary indicator we examine to draw conclusions.

Bitcoin’s volume over time, 2017–2020.

Why would correlation of Bitcoin to traditional markets matter? To put it simply, if Bitcoin is going to have a future, it must correlate to traditional markets. The biggest selling point of Bitcoin is that it has the potential to be a currency, store of value, that is actively traded. The US Dollar has long been the primary method of exchanging wealth for goods and/or services, regardless of geographic location. This might change in the near future.

BTC price action (above) and volume (below).

Pictured to the left is a sample of BTC price action (Top-half), and Volume (Bottom-half). Price action is simply movement in the price of the traded asset, up or down. Volume is a representation of the amount of Bitcoin being traded at any given moment. Without additional information, and only looking at the graph to the left, we can determine that an increase in trading volume corresponds to price action. This correlation occurs many times at varying strengths throughout the life of Bitcoin.

In a ‘chicken and egg’ manner, price can drive volume, and volume can drive price. The interrelation of these two elements is difficult to separate as they are so inherently connected. I feel that volume, specifically OTC volume, is one of the most misunderstood factors in trading. For now, let’s rest at the simplification that for price to change, volume must as well, and vice versa.

What makes these movements so interesting is that they repeat, and like any pattern in a market, they allow the trader to derive important information to speculate future prices. To divine a future price we must think as a traditional trader would; we must compare Bitcoin to its potential competition, the US Dollar.

Volume of US Dollars traded in the open market.

Pictured above is the historical volume of the US Dollar. This number represents an aggregated estimate, as calculating true OTC volume is a fool’s errand. As we can see, volume over time has only increased for the US Dollar, and the volume is measured in trillions. Much of this volume can be attributed to large institutions hedging risk or high value speculators such as George Soros. A fair percentage of this volume can be attributed to the retail traders who are simply exchanging between different currencies in hopes of deriving wealth from the changes in moment-to-moment value. Regardless of the cause, it is evident, the US Dollar is traded often and by many people of varying sophistication. This large amount of volume, on a daily basis, lends credence to the idea that it is the supreme reserve currency.

Due to how intensely and frequently the US Dollar is traded, it is allowed very precise price discovery. In simple terms, price discovery is the market trading in a manner that seeks to find the ‘true’ value of its underlying asset over time. In future articles, I will be discussing this in more depth, but for now, what I want you as the reader to understand is that price discovery is an important component to a functional (healthy) currency. Price discovery is the result of traders coming to a consensus on a fair market value at a specific moment in time. Price discovery happens at all times; there is no exception. Price action is the result of the ‘negotiation’ (trades/trading) that result in the discovery of a ‘fair’ price that traders can exchange at. As price changes, volume increases (non-linear relationship). As volume is traded, price changes. This holy trinity of Price Action, Price Discovery, and Volume are the basis for many of the most time tested indicators of an asset’s value, and potential value. As a note, please remember that price discovery does not mean volatility.

In the above chart, we can see the value of the US Dollar as compared to currencies of Europe averaged together. The graph at first glance looks very chaotic, and to a degree, you might be right to think so. Examining the scale of this chart, we see that it covers approximately 14 years of trade. The US Dollar, increasing in value and then decreasing, is the result of macroeconomic events in conjunction with the speculative value. For traders, with or without leverage, there is risk. Risk, in the context of a trade, is the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. I assure you, over those 14 years of data above, some traders took a risk they shouldn’t have.

More importantly than the price action or volume, I want you to appreciate one more thing: the difference between these two currencies was never more than thirty percent of initial value. Although not perfect, the US Dollar maintained an acceptable enough store of value that it remained to be the most traded reserve currency in the world. Because of the above, this is why we must compare Bitcoin to the US Dollar.

Let us now assess Bitcoin through this lens of Price Action, Volume, and Price Discovery using the US Dollar as our standard. First, let’s examine volume. On average, the US Dollar in all markets aggregated, will see about six trillion dollars worth of volume on a daily basis. This is a sharp contrast to Bitcoin’s range of two to thirty-three billion per day. The US Dollar trades one hundred and eighty times more value per day than Bitcoin. This lack of volume on Bitcoin’s side would signal very few are using it for its intended purpose — a currency — and instead speculating on its future value. This leads to a problem: until Bitcoin is being used as a currency, we will not be able to determine a fair market value in the context of it being used as a currency.

Next, let’s examine price action. In the above chart showing the price of the US Dollar against the averaged prices of the Euro sector, we are able to determine that the largest differential in price was approximately thirty percent. A thirty percent change in a trader’s portfolio can be a very good day or a very bad day. For some, this is far too much risk, and for others, they only desire more dramatic changes in price. As we are using the US Dollar as the baseline world reserve currency, let’s assume it is functioning as intended and a thirty percent change in value is acceptable.

Pictured to the left is the price of Bitcoin (green) against the US Dollar (red). For anyone that hasn’t bought a few Satoshis, the smallest functional form of Bitcoin (similar to a US penny), you are likely starting to calculate in your mind how to begin acquiring these magic coins. Already you might be speculating how much you have to gain if invested in this asset. I did not attach this image to draw you in, rather, I attached this image to scare you out. Many, mostly inexperienced traders, are basing their speculation on past performance (valid) but completely ignoring how low Bitcoin could go in the near-term due to its lack of adoption or possible disruption due to regulatory pressures.

Although Bitcoin had gains of more than a thousand percent in a matter of days at some point, on the other side of this coin were traders that were wiped out entirely and quickly. Rarely do the dead speak, and I assure you, any trader that has bet and lost his entire portfolio feels very dead.

With the US Dollar, under specific circumstances, you could lose your entire portfolio (Leveraged trades), but it would be unlikely to happen in a normal market. Yes, a thirty percent change in value is brutal, but please keep in mind that this is a small bump in the road for Bitcoin’s famous thousand percent moves. Everyone pictures themselves winning the lottery, few foresee losing all of their wealth due to a bit of bad news for the market. In this understanding, the US Dollar offers peace of mind that Bitcoin can’t.

For the US Dollar, price discovery is a very gentle process when compared to Bitcoin. Bitcoin, manically, seeks to find its true (current) value. A trading day that shows a thirty percent change in your holdings isn’t uncommon in the slightest for a Bitcoin speculator. For speculators with good information and even better timing, this price action is their lifeblood, it is how they earn their daily bread. To invest in any other asset would be unlikely to result in similar potential gains as offered by Bitcoin. This has created a positive feedback loop that consistently draws in the most risky of traders. Each price spike acts as a mating call to other speculators to see the potential. This in turn creates more volume, more price action, but more erratic price discovery as each speculator has their idea of the one true price without concrete evidence.

Until Bitcoin can form solid adoption as a currency, it will remain in a hell of constant speculation. The value of the US Dollar, not set in stone, does have concrete evidence for its value. US Dollars can readily be traded for real-world goods and services. We as humans can experience these goods and services and determine at the personal level if we made a good ‘trade’. For Bitcoin, this isn’t as simple. It is possible to trade Bitcoin for varying goods and services, but its purchasing power is reliant on its exchange rate with the US Dollar instead of humans actively comparing how many Satoshis is a fair trade for a loaf of bread. This tenuous connection to reality, only bridged by the US Dollar, allows for the shifting sands of Bitcoin to grow and shrink at a moment’s notice based on either fear or exuberance alone.

The barrier between reality and Bitcoin only serves marketeers eager to convince you of why you should be buying Bitcoin. With the above said, Bitcoin’s future price is largely unknown. With the potential of toppling the US Dollar’s dominance as a reserve currency, potential adoption as a one-world currency, and its fantastic ease of access, Bitcoin makes a fair argument for its price to rise in the future. How far away this future is, is unknown. How high Bitcoin could reach (and maintain) is an even larger unknown. If you hold Bitcoin, anticipating only happy days in your future, you are inexperienced to the ways of the market. For me personally, I see a long road to capital growth paved with Satoshis, and I anticipate the journey to be fruitful. Until then, I still see a Bitcoin market trading at or near $5,500.00 in the very near term, and for a very long time. I plan to discuss in subsequent articles my reasoning for what I believe to be not only the fair market value of Bitcoin but why traders around the world will agree with me. I currently hold a position in Bitcoin as of publication.

“The poor will teach the wealthy”

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