The cryptocurrency industry fell out of favor in November, with a sell-off across cryptocurrencies leading prices sharply lower over the latter half of the month. Notably, Bitcoin slumped from the level of $6,400 it had largely been around since June to well below $4,000 by the end of November. In fact, the popular cryptocurrency is currently trading at its lowest level since September 2017. This is primarily because investors had been following a buy-and-hold strategy over the last several months, as they remained hopeful of a big surge in price once the SEC clears Bitcoin ETFs. However, continued concerns about the lack of proper market surveillance and custody in the industry contributed to the sell-off. And with the SEC delaying its decision on a Bitcoin ETF further to February, it doesn’t look like Bitcoin prices will see a rally in the near term.
However, we believe that investor concerns are overblown. The number of unique Bitcoin users has nudged higher in the last five months, and total Bitcoin transaction volumes also reversed the steady decline seen over August-October (albeit because of the sell-off). Using the current values for the number of Bitcoin users and transaction volume in our interactive Bitcoin Price Estimator shows that the fair value of the key cryptocurrency should be around $4,900 – a figure that is 25-30% above the current market price.
The graphic below captures our base case forecast for the monthly average price of Bitcoin over the next six months 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 bullish and bearish outlooks for the period.
What Drives The Price Of Bitcoin?
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 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. Although Bitcoin prices are susceptible to extreme volatility, they have largely moved in tandem with news that signaled either increased adoption in the future – like Goldman’s original decision to set up a cryptocurrency trading desk, and IntercontinentalExchange’s ongoing work on a new trading platform that supports cryptocurrencies – or setbacks in terms of long-term adoption, like a cyber-attack on two South Korean Bitcoin exchanges in June, followed by the SEC rejecting several Bitcoin ETF plans.
In our interactive Bitcoin Price Estimator, we forecast changes in the number of unique users as well as transaction volumes for each month through mid-2019 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.
For several months now, investors have bet on a surge in Bitcoin prices due to the SEC’s approval of Bitcoin ETFs. This is because such a move would make Bitcoin a more mainstream investment option – and make it accessible to institutional (as well as many retail) investors. This, in turn, should boost the number of Bitcoin users and greatly increase transaction volumes in the cryptocurrency. As we detail above, these two factors directly drive the price of Bitcoin.
Although the SEC rejected several proposals for Bitcoin ETFs earlier this year, it has softened its stance towards the industry in a series of steps over recent months. It is reviewing the proposals again, and also invited investor opinions about the pros and cons of a Bitcoin-linked ETF which could very well be the first Bitcoin ETF. However, investor optimism took a hit in late November from signs that the SEC will not green-light the Bitcoin ETF anytime soon – something that was confirmed earlier this week, with the SEC’s announcement to delay the decision further to February.
The uncertainty surrounding Bitcoin’s future will understandably lead to a reduction in number of Bitcoin users over time until the SEC takes a call on Bitcoin ETFs. As we show in the chart below, the SEC’s action (or lack thereof) can make all the difference between Bitcoin’s price falling to just $2,000, or crossing $10,000 within a matter of months. The thick grey lines below represent the base case scenario, while the green and purple lines represent the upside and downside scenarios, respectively.