The Future of Cryptocurrencies: There’s a 20% Chance of a Bitcoin Correction

What will happen next year? Crypto-technologies have integrated deeply into the financial world — the future of Bitcoin has already been announced, cryptocurrencies are indexed on exchanges, token sales successfully raise funds. Without any doubts, cryptocurrencies have become part of the economic landscape.

But will this development continue at the same incredible pace, or will it instead become more streamlined? Will the Bitcoin’s rate continue to grow, or can we look forward to some correction? How flexible or rigid is regulation going to become?

We asked the head of BANKEX Capital Network David Finkelstein to share his insights about the future of cryptocurrencies in 2018.

To what extent are cryptocurrencies accepted today?

Many affluent people today still have no faith in cryptocurrency, attributing its dynamics to the hype and expecting it to crash. Personally, I don’t believe in such collapse. I believe cryptocurrency is going to find its place in the modern economy, even though for the time being, unlike other assets, it has no fundamental evaluation.

When, for example, you purchase shares in Tesla, you can look to the various models in order to estimate the fundamental values of the shares. Which is why, if Tesla shares suddenly skyrockets, it will be clear to everyone whether its price is warranted. This model, at least, allows you to understand what kind of profitability the marketplaces in the shares.

In case of Bitcoin, however, there is no such model, so nobody knows how much it should be worth. From my perspective, its proper value is supposed to be derived from the quotient of USD people are willing to store in it. For instance, if people are willing to store $100M in Bitcoins, while the total amount of bitcoins is 21 million, we can divide one by the other then we will receive a reasonable exchange rate for Bitcoin.

Why store dollars in Bitcoins? Will cryptocurrency replace fiat currencies?

This is unlikely to happen. Because there are countries that can, at any point, put an end to the existence of the crypto world. It’s not complicated, but they don’t want to do it. What they want to do is to head this whole movement in order to collect taxes. That is why regulators all over the world are pondering how to find a better approach in this field. And when they come to a conclusion, which may well take time, the rules of the game will change.

Bitcoin is already being referred to as “digital gold” and one of its unique features is its finite amount. We don’t know how much gold there is in the world, and someone might discover a new mine and start extracting it. That is not the case with bitcoin. Imagine if there was a limited amount of dollars and you could never print more.

That’s normal, it means there is a secondary market needed. Bitcoin, like anything else, has its market price, which is currently being defined by crypto exchanges. In economics this is always the case: when a person has an asset, there will always be a sum for which the person would be willing to sell this asset. If everyone decides to sell the Bitcoins they have, its price will decrease. Whereas if many people decide they want to buy them — their price will grow. But between them, there will always be an equilibrium price.

Will other cryptocurrencies as powerful as bitcoin emerge anytime soon? Right now we see an enormous gap between Bitcoin and all other cryptocurrencies.

Generally speaking, all cryptocurrencies is a whole. Bitcoin grows simply due to the fact that the concept of crypto-currency is associated only with it. The investments from non-professional players have begun to invest in Bitcoin and that stimulated such a growth — an asset can only keep growing while there is a demand for it. If it’s a bubble, then it bursts once the influx of buyers comes to an end. This leads to a natural state of panic and all starts to collapse.

Can you make a balanced portfolio out of cryptocurrencies? Even though they move together with Bitcoin?

Yes, you can. A balanced portfolio can be made out of anything. Every time we add any new asset, it decreases the overall volatility of the portfolio.

What should one add to bitcoin in order to make such a portfolio?

That depends on the goals of the portfolio. If it’s solely for sake of exposure to crypto, then you would need to add other cryptocurrencies. But there are many nuances. If it’s a long-term portfolio, then it would require some Bitcoin, some Ether, and some other cryptocurrencies, evaluating them in terms of reliability and combining them with reasonable counterweights. You can calculate the Kelly Criterion, optimize your portfolio… but all of this has to be done professionally.

Are there other secure cryptocurrencies besides Bitcoin and Ether that are worth including in your portfolio?

There must be, but I am not ready to name them. The reality today is that people mine whatever is the cheapest because it’s easier. But for now, the market has no faith in new currencies, because the power of a currency is defined by the number of people who use it, and this number is not great enough. So people mine it, then at the end of the day, they convert whatever they mined into Bitcoin because it’s considered more secure. How exactly this situation is going to change, I can’t tell now.

With the year coming to an end comes a time to make predictions. What do you think will happen to Bitcoin, how will the world of cryptocurrency develop in general?

If we are talking about exchange rates, then I don’t believe it will drop too much. There will not be a total crash. I would say there’s a 20% chance of a significant correction of Bitcoin rates to the level of $5000. For the same reasons I have already mentioned earlier — there is no fundamental model, based on which you could say Bitcoin is worth 5 or 100 thousand dollars.

In all other cases, whenever collapses occur in the market, there is always a fundamental price model, and that has been true for everything from tulips to shares in certain tech companies, that is, in my opinion, currently overrated.

In this case, either the market value catches up with the model and the asset rises or model catches up with the cost.

How much is the level of cryptocurrency acceptance going to grow? What will happen to regulations?

There is no doubt that everything is going to develop very rapidly. New products will emerge in capital markets and they will very find ways to implement crypto quickly. Basically, everything there is on the financial markets today will re-emerge with the form of crypto. And I do mean everything, such as advisory, investment management, financial management etc.

All the same, but with “crypto”?

It will more likely be crypto-fiat asset management. Asset managers now want crypto to be included in their portfolio. Another noteworthy trend is that at some point regulators will have to find a suitable place for crypto. I don’t think this field will enjoy as much leniency as there is now. There will be more regulations, as well as mutual conversions and eventual integration between fiat and crypto-financial services.