Disclaimer: The information in this blog represents the opinions of its author and is for educational purposes only. It is not intended as investment advice. Cryptocurrency markets are extremely risky so you should only invest money you are willing to lose.
A New Digit For Christmas
So-called experts and financial analysts have been performing all kinds of mental gymnastics to tag bitcoin with a "fair and rational" valuation, but by the time they look up from their spreadsheets, the crypto-juggernaut has already blown past them, leaving their coke-bottle glasses covered in dust.
Almost Nobody Predicted This - But We Did
Right now bitcoin is trading just a hair under $10,000 - no that's not a typo - bitcoin is adding an extra digit.
Are you ready for this? - the currency that once evoked images of a seedy, dark-web, money-laundering, drug-trafficking underworld is now bigger than McDonalds, PayPal, IBM, Disney, GE, Bill Gates, Amazon's CEO, and 135 countries. It gets more tweets than Facebook, Google, or Amazon and it's about to start trading on the oldest commodities exchange in America.
Beyond Our Wildest Dreams
We've been predicting $10K bitcoin by year-end for months, but who could have imagined $10K just a few days after Thanksgiving? Even that was beyond our wildest dreams - a 10x return since January 1st.
The Currency That Defies Valuation
There's a good reason why the experts are left scratching their heads in bewilderment - the models they're using to try to place a fair and rational valuation on bitcoin are based on "normal" government-issued fiat currencies.
Government issued fiat currencies are constrained by borders and regulations, subject to bank and government fees, and, in the case of cross-border remittances, hamstrung by even bigger fees and international exchange rates that always seem to favor the big banks over the little guy.
Bitcoin doesn't suffer from any of these constraints - not only is it not constrained by borders on a map, government regulations or a byzantine foreign exchange rate system, it's not even constrained by planet Earth. As we wrote about in a recent post, bitcoin could have the first-mover advantage to become the de facto intermediary of value transfer and storage for colonies in space or other Earth-like planets since these new colonies will be inhabited by people from different countries and some not even born on earth.
Old Rules Don't Apply?
Eye-rolling is the usual response to "the old rules no longer apply", but sometimes the old rules actually don't apply.
The world's biggest taxi service, Uber, doesn't own a single vehicle.
Airbnb, which doesn't own a single property, provides more accommodations than Marriott or Hilton.
These are innovative, disruptive, peer-to-peer technologies that eliminate the middleman, and the need for a trusted third party. Sound familiar? That's what bitcoin is to money.
Experts are constantly bending over backwards to shoehorn bitcoin into their antiquated model of market valuation and pin its price to some quantitative fundamental - like transactions, adoption, new wallets, hashrate, number of rich addresses, google searches, or tweets.
Bitcoin Defies Dissection
But bitcoin defies dissection down to quantitative fundamentals. It's valuation is a completely different animal. Because it is a completely new and revolutionary asset class that's never been seen before, the fundamentals take a backseat to investor sentiment.
Neuroscientific studies have established that we humans delude ourselves into believing we are making rational decisions. In truth we act emotionally - and then retrospectively justify our actions with reason.
Investor sentiment about bitcoin, which dominates all other fundamentals, can be demonstrated in the chart patterns that we have been analyzing on this blog. For months we have been pointing out highly predictable and extremely powerful Fibonacci wave patterns with almost pinball-like bounce points in specific, well-defined target zones.
The reason that these mathematical formulas work so well is that they are based on human behavior, not on the fundamentals of the underlying (aka "spot") commodity or currency.
Behavioral Models of Optimism, Fear, Greed, Panic
So while coffee futures prices are affected by the weather in Brazil, and bitcoin price can drop because of a Chinese government ban or a kerfuffle over a hard fork - how high they spike, how steeply they drop, and where they bounce can be mathematically predicted using Fibonacci math, which is governed by human behavioral models of optimism, fear, greed, panic etc.
The highly predictable nature of bitcoin's price waves demonstrates that the most important fundamental aspect underlying bitcoin's price is not any particular statistic about bitcoin itself but rather the sentiment of investors.
No Magic, Just Math
Look at the charts in this blog post and our previous price analysis posts and you will see the clear pattern of pinball-like bounces and advancing waves that are predictable using Fibonacci mathematical calculations.
Bitcoin's price gains to the upside are also magnified by a curious phenomenon that no other traditional currency has ever experienced - from the very start bitcoin had to dig itself out of a deep hole of universally negative PR.
The reason for the astonishingly powerful momentum of the price moves is that no asset in history has dug itself out of such a hole to hit euphoric heights in such a short time.
Think about it - as recently as a year ago the word "bitcoin" evoked images of a seedy, dark-web, money-laundering, drug-trafficking underworld. Talk about a mainstreaming transformation! Now bitcoin gets more tweets than Amazon, Google, and Facebook; it will soon be traded on the oldest commodities exchange in America; and an entire episode of "The Big Bang Theory", one of the most popular sitcoms in history, is entirely devoted to bitcoin and will be seen by an estimated 17 million people.
Connotations surrounding bitcoin have undergone a rapid, seismic shift. Now when people hear the word "bitcoin", they think store of value and global borderless currency of the future. A year ago most investment banks were completely hands off, and hedge funds kept bitcoin trading on the DL. Now they're all in the game, trying to grab a piece of the action. Over 100 hedge funds have been created in the past year to trade only digital currency. Even bitcoin's most outspoken Wall Street critic, Jamie Dimon, CEO of JPMorgan Chase, has softened his stance.
Too bad for the clients of all those investment banks. While Jamie DImon was busy bla-bla-ing all that bitcoin vitriol, his clients missed out on a 10x move in less than 11 months - the kind of return on investment that can take more than a lifetime in the stock market.