The most popular question from institutional investors is, “What will happen to the price of Bitcoin?”
Surprisingly, this question is not asked because the investor is thinking about deploying institutional capital into the asset, but rather they are personally interested in Bitcoin’s price fluctuations. Additionally, these capital allocators see Bitcoin’s price, whether for good or bad, as the leading indicator of market health.
Given Bitcoin’s previous parabolic runs, and ensuing 60%+ drawdowns, many investors have become shellshocked. The market behavior is unlike anything they have seen before, causing them to forget many core principles of investing.
Ultimately, price is simply a function of supply and demand. When more investors want an asset, the price rises. When fewer investors want an asset, the price falls. This principle played out perfectly in Q4 2018. We saw a spike in mainstream media coverage, Google searches, and retail investor sign-ups for cryptocurrency trading platforms.
The surge in interest, coupled with potential market manipulation via price support from Tether, drove the price from under $5,000 to almost $20,000 in approximately 90 days. Bitcoin became overvalued and investors became less interested in purchasing the asset at the unsustainable prices. As you would expect, a large drawdown ensued, which left many retail investors quickly bleeding money as they realized they had bought the top of the market.
So the demand for Bitcoin continued to dissipate as reality set in and the promises of “get rich quick” started to fade. For the last few months, Bitcoin has settled in the $5,500 to $8,000 range and continued to mostly move sideways.
The market appears to be acting irrationally though — we continue to see larger organizations join the ecosystem, more institutional-grade infrastructure is being built, and each week seems to bring more bullish news announcements. Yet the market continues to move sideways, regardless of the new entrants, infrastructure or news.
Price is a function of supply and demand. Unfortunately, the positive news we continue to see in the industry is related to supply, not demand. It continues to get easier, safer, and more compliant to buy, sell and trade Bitcoin. There is more infrastructure and legitimacy than ever before. The progress is impressive, but it has failed to incite newfound demand in purchasing Bitcoin from a large enough crowd. Until this happens, we can expect Bitcoin to stay under $10,000.
So what could be the catalyst for this increased demand?
Retail products — Very few people in the world currently own Bitcoin (estimated to be less than 2% in US). The creation of retail investing products, like ETFs and ETNs, would drastically reduce the friction in gaining financial exposure to Bitcoin, while also increasing investors’ confidence in the asset class (Retail products have to be approved so they generally are believed to have high levels of security, insurance, etc).
Consumer use cases — While sometimes an unpopular opinion, Bitcoin is not a great medium of exchange at the moment. The lack of settlement speed, merchant support, and high degrees of volatility, make it hard for consumers to part with the digital currency in exchange for products and services. Once the mass consumer can use Bitcoin widely (and efficiently), it is easy to see why demand would increase.
Institutional confidence — The entrance of institutional capital into crypto markets is a widely discussed topic. If this class of capital allocators were to jump in, there would be a major increase in demand. Currently, institutional investors are sitting on the sidelines because of the lack of name-brand custody solutions, lack of education, and low confidence levels in the ability to predict higher price movements. Once these issues begin to be resolved, sentiment will quickly change and big dollars will flood the market.
Economic chaos — Demand for an asset is usually determined in relativity to other assets that are available. If there was an economic depression, egregious national currency inflation, or other chaotic event, a single country or region could see their population flee to Bitcoin’s deflationary model. We have seen this situation previously play out for short periods of time in Catalonia, Zimbabwe, Iran, China, and Venezuela. It would be naive to think Bitcoin won’t continue to be a safe haven for different people around the world.
While this is not an exhaustive list, it includes the most likely scenarios in my opinion. In each, consumers or investors are drawn to Bitcoin as a more attractive store of value or medium of exchange. Given the current market environment, any catalyst driven by something other than “Bitcoin is better money or gold,” will likely be short lived.
Bitcoin is hitting its stride. It has weathered every threat imaginable in different jurisdictions, but it has not died. The digital asset is anti-fragile. As more people realize the benefits, we can anticipate more users to jump in. Until then, we’re likely looking at a stable, yet non-appreciating market price for a little longer.