Bitcoin Should Trend Higher For The Rest Of The Year, But Don't Expect It To Exceed $8500


Bitfarms signage sits on display next to racks of cryptocurrency mining rig components at the company’s technology lab in Saint-Jean-sur-Richelieu, Quebec, Canada. Photographer: James MacDonald/Bloomberg

The first week of September turned out to be a bad week for cryptocurrencies in general, with reports of Goldman delaying plans for its proposed cryptocurrency trading desk hurting investor sentiments. The news sent Bitcoin prices plummeting – erasing the strong gains the cryptocurrency witnessed over the first few days of the month. Bitcoin is currently priced below $6,300, which is around the levels at which it traded for most of August.

While Bitcoin is no stranger to extreme volatility, the latest sell-off seems to have been overdone. We believe that Goldman’s decision is just a hiccup in cryptocurrencies’ path to mainstream adoption; ongoing efforts by a wide range of big and small companies across industries to incorporate blockchain technology should inevitably boost the adoption of prominent cryptocurrencies and tokens in the long run. As we detail in our interactive Bitcoin Price Estimator, there should be a steady recovery in the number of unique users as well as transaction volumes on the Bitcoin network over coming months – helping Bitcoin prices reach around $8,500 by the end of the year.

The graphic below captures our base case forecast for the monthly average price of Bitcoin this year based on our estimates for transaction volume and number of Bitcoin users, and also shows a possible price range for the cryptocurrency taking into account a relatively bullish as well as bearish outlook for the rest of the year.

What Drives The Price Of A Bitcoin?

Like the price for anything, Bitcoin’s fundamental price depends primarily on demand and supply. Demand for Bitcoin is primarily driven by two factors: the number of active users, and how much they transact. On the supply side, the number of available Bitcoins is capped, and about 80% of the capped number is already mined. As such, it is sensible to focus on the demand, both in terms of users and transaction volumes.

This also makes sense given the fact that Bitcoin prices over the years have primarily been driven by the perception of how a particular piece of news boosts or hurts the potential number of Bitcoin users and their transaction volume in the long run. This has held true for the period since Bitcoin was first introduced, barring the last few months of 2017 when the media euphoria surrounding cryptocurrencies drove Bitcoin prices to an all-time high of almost $20,000. Since then, Bitcoin’s price has moved in tandem with news that signaled either increased adoption in the future – like Goldman’s original decision to setup a cryptocurrency trading desk and IntercontinentalExchange’s ongoing work on a new trading platform that supports cryptocurrencies – or a setback in terms of long-term adoption – like a cyber-attack on two South Korean Bitcoin exchanges in June followed by the SEC more recently rejecting plans for a Bitcoin ETF.

In our interactive Bitcoin Price Estimator, we forecast changes in the number of unique users as well as transaction volumes for each month over the rest of 2018 to arrive at our estimate for Bitcoin’s fundamental value. This video shows how to leverage our bitcoin pricing dashboard. While the dashboard looks fairly basic, in back-testing – a method to see how well it could have predicted prices in the past – it was almost 94% accurate.

As we pointed out above, we expect the number of users on the Bitcoin network to continue to grow steadily over the coming months, which is why we believe the Bitcoin price will jump more than 30% over the next three months to reach $8,500. While this figure pales in comparison to the high it reached last year, and is also well below the $10,000-level seen in May, it should be noted that the SEC is still reviewing proposals for a few Bitcoin ETFs. Approval would act as the single-biggest growth catalyst the cryptocurrency industry has seen to date, and presents a huge potential upside to Bitcoin prices. Notably, efforts to improve regulators’ perception of the nascent industry should receive a boost in the near future thanks to the recent formation of the first full-fledged cryptocurrency lobbying group, the Blockchain Association. In our view, it is only a matter of time before Bitcoin sees another strong rally, but the pace of growth over the coming months is unlikely to be spectacular.

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