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What moves bitcoins price? Here's my 2 cent...

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Thought I'd do a little copy past from one of my earlier posts given we're hitting some recent highs and seeing a significant rally in 2019. As I said this draws on a previous post I made on the bitcoin 500MA post here. 

What moves the price of Bitcoin?

  • It is a truly truly truly inelastic asset. When gold goes up, people start producing more. When oil tanks, people don't pump as much. Even housing and infrastructure will be able to scale up or down depending on demand. Crypto however has a fixed amount being created which is mathematically restrained and can't be altered. When demand shifts people will gobble up the inelastic asset and supply demand curves will react accordingly. UPDATE: still think this is very relevant. 
  • Liquidity is thin. Honestly - don't just take my word for it - have a look at the global volumes. All it takes is a $100,000 dollars odd and you can move the price of some of these assets a hundred dollars or so. Thin liquidity means that prices can move very quickly either way. At the moment we are in a downward trend, but as soon as that turns and people jump on the bandwagon again ... well, we've seen it happen before. UPDATE: Not as much as prices are higher so the same amount of USD value won't hit the exchanges in the same way, liquidity is better in OTC venues which is where the majority of Crypto switches hands, exchanges have better order types and order routing these days as well. Lots of 'risk off' groups as well - algo V algo buying and selling giving false liquidity. Still, look at the book. Thin-o-saurus-rex.
  • Hold. Become rich. Simple. EVERYONE knows about a mate, or a mate of a mate, or at the very least an article somewhere talking about buying crypto, holding onto it, and becoming rich. That's the way things are. It's happened over the last ten years and now the world has it in it's psyche that it's fact. Those who hold wont sell, whilst those on the sidelines are just waiting to get in. UPDATE: still the case, if not even more so. 
  • Bitcoin halving event in 2020. Over the last two halving events BTC prices have doubled. Again, this is all we have to go on, but people think that it's happened in the past so it's sure to happen in the future. Wait for it ... we'll see parabolic once more. UPDATE: was early on this one - but it'll come and i think we're heading for 50k BTC.
  • ETF city. People want it. It's coming. It's just a matter of time. UPDATE: this has happened to some extent in certain markets. BTC values soared. ETH is looking for the same - futures and ETFs are argubly still on the cards because exchanges and ETF providers are all private or listed these days and need to either keep an eye on share holder value and capital growth. They can either - a) increase prices (tough), b) increase flow (tough), c) add new asset types to create new revenue streams (easiest of the three). 

What are your thoughts? Lets get a thread going...

 

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Bloomberg: Ballyhooed Bitcoin Futures Contract Bows Out With a Whimper

Bitcoin isn't money.  The quantity of Bitcoin is not and cannot be linked to the amount of economic product.

Bitcoin isn't a store of value.  Some call it 'digital gold' but it is far too volatile for that.

Bitcoin is both a Ponzi and a pyramid scheme.  It has persisted as long as it has because of negative real interest rates. 

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@cryptotrader wrote (in Silver Bullet thread):

"I've always thought that cryptos are completely unrelated to other asset types which is why they're so difficult to price. Everything else has the inter-connectivity between themselves (Fed IR effect USD 'value', which knocks on to USD denominated assets, which leads into equities, re-positioning etc) but always thought crypto is a world unto its own. Linked to cost of production - electricity, CPU costs etc."

I think the notion that crypto is something apart from the rest of the financial world is a concept that pervaded the first internet boom; the idea that the internet was going to change the nature of business and society by providing free access to everything and there for traditional business models would fail.  Instead the first internet boom failed, well hardly surprising as all those budding entrepreneurs forgot that you have to make money by charging for goods or services to become a millionaire (although a few clearly did purely off the back of selling out early enough - which is a watch out now on crypto for anyone invested for the long term).  Out of the ashes rose the second internet (or tech) boom but interestingly the winners were those that effectively adopted traditional business models (i.e. the need to make profits and generate positive cashflows - duh!).  The share prices are now massively over inflated of course but that is just financial market forces (the markets can remain irrational longer than we can remain solvent, kind of thing) rather than anything intrinsically wrong with their business models.  Now that these businesses are profitable and hold masses of cash (masses!!!) they can withstand a major downturn, perhaps better than some other more traditional sectors, and be positioned well for the eventual recovery.  It is this recover where I think we will see the really discontinuous tech disruption, the next leap forward.  This is what happened after the first internet bubble burst.  It is after the crash and clear out that we will see Crypto, or rather the blockchain type technology, become mainstream in terms of replacing physical cash, this is the end game, not some nirvana of a non FIAT collective new age hippie dippy free of politics currency (or set of currencies) that everyone will use free of government control - you might as well just howl at the moon as think that is ever going to happen.

As regards you comment about Crypto being apart, well how do you buy or invest in Crypto?  With cash of course.  And how it is currently "valued" in the markets?  In USD, hmm...

The real problems at present for Crypto, and the reasons it will all end in tears until the next iteration are (for me):

  • There are too many Cryptos, until it is mainstream (i.e. the tech backing electronic FIAT currency, which is the root of the concept of currency right back to the earliest days of non precious metal currency (i.e. the right to exchange a paper bill for gold) it is the wild west.
  • Ordinary people are not using Crypto as a currency, it does not have wide adoption
  • It will not get wide adoption until it is better understood and backed by something normal people recognise as sound (i.e. governments)
  • There isn't sufficient liquidity for wide adoption and consequently the price of a bitcoin is too high for a normal person to use it (similar problem with Gold BTW, which is why I prefer Silver for true disaster insurance and consequently hold physical silver coins)
  • The price is too high and too volatile, it is in the hands of speculators - hence it is a mania
  • The idea that Crypto is a store of value is laughable.  When the $£!& hits the fan people will buy Gold and Silver and USD and Yen, things they understand and can cling to in an uncertain world.  They will not buy bitcoin.  Even if they wanted to how can any normal person buy bitcoin at $50,000 per coin?  Barking mad the whole thing - but this is what I expect at the end of the cycle so carry..!

 

 

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Interesting point of view @Mercury - however I think the analogy is slightly tenuous. Arguably bitcoin and other blockchains such as ethereum et al, is the same as investing in the TCP/IP of the internet boom. This isn't like investing in pets.com - this is like investing in the underlying framework and protocol of the internet itself.

Ordinary people aren't using crypto - also true, however you can't deny that adoption and integration isn't growing exponentially. Hardly anyone was using computers or the internet when you had to type command lines rather than use a GUI. Adoption takes time, but given the number of invested actors and the current trajectory it'll happen at some point. 

People can also buy at 0.00000001 BTC so to think it's a whole product isn't really the point. You often hear the saying 'if you don't believe in bitcoin, it's likely that you don't really understand bitcoin'. Whilst overly offensive, I do see why people say that.

I think a lot of these propositions also fail to miss the point of what we're talking about here. They're all going off at an angle ... we're not arguing "Bitcoin is the next store of value / replacement to USD" blah blah blah. What I'm saying is this is what moves bitcoin price. 

If you're a trader, and a technical trader at that (I never really see you post fundamentals nearly as much as technical analysis), does it matter what the asset is? Just it's price, it's price action, and it's conformity to your models? 

Whats your Elliot wave / technical view? And whats your conviction? Have you places a short if you think it's going short? 

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All analogies are in some respect tenuous, @cryptotrader, they are merely vehicles for telling a story; it is one way humans conceptualise, rationalise and communicate complex situation, perhaps erroneously so.  Comparisons though are a little different, we can draw lessons from history despite the different specifics.  Many, if not most of the internet service providers who leveraged/developed the early TCP/IP protocols also went bust or got gobbled up as the mainstream players (mobile, satellite, Telcos) got to grips with the emerging tech and the potential for it.  Players like Amazon, Apple and Google are the ones who took the lions share of the bounty on offer though, and that has little to do with the connectivity, more about commercialising the consumer opportunity.  All of this took place in the second wave as narrowband gave way to broadband, WAP to smart phones and physical infrastructure improved speeds, making the dream a reality.  The problem with internet 1 was the dream was not based in then reality, it could not be delivered.

I do not know if it is the same for Crypto, as you suggest I do not know enough about it, but the parallels from my early internet experience are striking for me.  One area I do not draw a parallel with internet (inc. mobile) development is the consumer applications.  Crypto (or rather blockchain), in my limited understanding, is more of an accounting (or banking if you prefer) innovation, which is one reason people talk about it disrupting banking convention and fiat currency.  As others (and previously I too) have suggested, this idea of disruption in the sense of "tearing down the big banks and big government influence over the financial system is the stuff of anarchic dreams.  It didn't materialise with the internet, I don't see any chance it will with Crypto/block chain (in fact less chance as the impact on big banks and government would be untenable - they wont let it happen - unless people think there will be a great anarchic upheaval, in which case tinned goods is the commodity of choice I would venture).  Rather the second wave will be a normalisation of the tech into mainstream systems and so investing in second wave tech companies is the way to play it smart rather than seeking to be an early adopter.  In my experience the early adopters usually get killed off.  This is the fundamentals of my thesis on Crypto.  Invest in blockchain technology not in crypto currency is my point but timing is crucial, as with all things.

Regarding adoption based on ease of use etc, the difference is computers became mainstream because traditional business adopted the technology in search of improved efficiency and required people to use it.  Interestingly enough mobile was more consumer led (but still pushed by mainstream companies - I was working at Disney at this time and saw it from the coal face) but I don't see a consumer led driver with Crypto, it will have to be the other way around.  The key to any medium of barter is trust.  Do you think sufficient people trust Crypto for it to replace Fiat currency?  What would that take and how long?  Not any time soon is my judgement.

Fair point about the buying lot sizes but most people don't know how it works so most will not adopt it is my main point, until it is mainstream.

Regarding trading and what moves the price, again fair enough, I guess I was responding to your initial post on Silver rather than the thread title.  I don't disagree with any of your points re what moves bitcoin except to say that the overall driver is sentiment, in this case it is $$$$$.  That is why people keep talking about halving events and $50k, $100k valuations.  This is a mania to me, it is not unlike the first internet bubble but very different from the second tech wave.

Regards Fundamentals vs techncials, I have posted on this extensively in the past but to summarise: I use Fundamentals analysis to assess the current position and long term outlook for any given market and seek to corroborate this with technical analysis (this is an iterative process).  I use only technicals to analyse medium to short term outlook and price action plus charting indicators to enter and exit a trade.  I pay no attention to news unless it impacts my long term outlook assessment but most news and data releases are a distraction, at most a short term impact factor and at worst actually signalling exactly the opposite of what the MSM are saying (hence commentators constantly talking abut **** news was baked in to rationalise why markets respond counter intuitively).  I sometimes use this as a contrarian indicator.  I am a long term swing trader so I don't care about day to day moves, much less intra day moves.

Regarding trading Crypto, I don't, at all, and never will.  I track it as a contrarian indicator for the general sentiment malaise I see in the market place.  The greater the Hyperbola the more Bearish I become.  Warren Buffett said, only invest in what you know.  He has broken his own rule of late, investing in Amazon...  Is that the edge of the cliff I see before me..?

Doubtless there is money to be made trading Crypto from both sides, like any asset class, as you suggest.  People need to be comfortable with what they trade and I am not comfortable with Crypto, neither with the asset class longevity, nor the volatility nor, crucially, my ability to call it (I don't know enough about it).  But here's the thing, I could devote my life to researching Crypto but why would I do that?  I would only do it if I wanted to invest in it, if I was searching for potential.  If that were the case then I would be predisposed to finding that potential.  This is confirmation bias in action.  As a professional analyst (not in financial markets I hasten to add) I seek to guard against this kind of thing in my commercial analysis.  That doesn't mean I don't have bias, everyone does, it just means that I seek self awareness (of my bias) so I can manage it.  The problem I see with a lot of commentators (even or especially those on Real Vision of late) is they are clearly invested in the idea.  This is exacly the same fervour I witnessed int he first internet bubble.  The risk is too great for me.  There is lots on offer elsewhere, though it may take longer to generate profits.  I am not seeking a get rich quick scheme, I'm happy with slow and steady.

Doesn't mean I can't have an opinion though right?  Surely at least one dissenting voice is useful as a counter balance.  Might be good to hear from a few more though.

 

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Interesting detailed reply @Mercury - thanks. 

17 hours ago, Mercury said:

As others (and previously I too) have suggested, this idea of disruption in the sense of "tearing down the big banks and big government influence over the financial system is the stuff of anarchic dreams.

absolutely agree. Thats a wishful ideology, however i do think there is serious opportunity to make do with a **** ton of inefficient systems, companies and processes. 'Middle men' if you will. The big four need to be very worried in my opinion, along with all these ridiculous institutions which charge an arm and a leg for verification of facts. (accounting firms, banks, mortgage providers, home ownership stuff, deeds). 

17 hours ago, Mercury said:

Invest in blockchain technology not in crypto currency is my point but timing is crucial, as with all things.

Also true to some extent long term, however where are we at the moment? wouldn't you say that my initial points above (which don't focus on any sort of ideology but rather on market dynamics, current sentiment, and increase in adoption) are correct? Would be interested in the rebuttal, if you believe there is one, to these very specific points.

17 hours ago, Mercury said:

Interestingly enough mobile was more consumer led (but still pushed by mainstream companies - I was working at Disney at this time and saw it from the coal face) but I don't see a consumer led driver with Crypto, it will have to be the other way around.  The key to any medium of barter is trust.  Do you think sufficient people trust Crypto for it to replace Fiat currency?  What would that take and how long?

Interesting! What were you doing at Disney? (And side note - thoughts on recent merger?) 

Crypto is two sided. One side is the cryptographic and mathematical certainty which it provides - in theory you shouldn't need 'trust'. Do people however understand? No. Do people trust the other third party providers who offer wallets etc? No.  How long will it take? Unknown, however putting £1000 (fictitious value) in now for a potential 10x (if not more) return in 5 years is a nice risk reward ratio which I'd be willing to take with x% of my savings. 

17 hours ago, Mercury said:

I don't disagree with any of your points re what moves bitcoin except to say that the overall driver is sentiment, in this case it is $$$$$.  That is why people keep talking about halving events and $50k, $100k valuations.  This is a mania to me, it is not unlike the first internet bubble but very different from the second tech wave.

Ahhhh - sorry was replying as i went - think this answers my point above - will leave it as is tho. 

17 hours ago, Mercury said:

Regarding trading Crypto, I don't, at all, and never will.  I track it as a contrarian indicator for the general sentiment malaise I see in the market place.  The greater the Hyperbola the more Bearish I become.  Warren Buffett said, only invest in what you know.  He has broken his own rule of late, investing in Amazon...  Is that the edge of the cliff I see before me..?

Agree with the green - unsure on the red. A contrarian indicator to the wider market or specifically Bitcoin? If the latter isn't this just a counter trend concept? Also doesn't it follow that

  • if you're not interested in trading one way or the other its because you don't have a solid enough conviction either way (even if this is because you've taken the sensible decision to not on things you're not 100% with)
  • then you also shouldn't use it as an indicator on anything. Premise is the 'if you dont put your money where your mouth is' on the trade concept, then you wouldn't / shouldn't believe in it as an indicator either? 
17 hours ago, Mercury said:

Doesn't mean I can't have an opinion though right?  Surely at least one dissenting voice is useful as a counter balance.  Might be good to hear from a few more though.

absolutely! it's why we're all on a forum rather than just reading an article :) debate and objection is welcome! 

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22 hours ago, cryptotrader said:

i do think there is serious opportunity to make do with a **** ton of inefficient systems, companies and processes. 'Middle men' if you will.

I think that is true @cryptotrader, all game changing initiative have a root in addressing either an untapped (or as yet unknown) consumer need or a market inefficiency (whether structural or enforced as with a cartel).  However I think this will manifest in the next iteration via leverage of the blockchain type technology rather than independent crypto-currency, when it becomes mainstream.  What it may offer is the ability for more banks to drive greater competition and thereby cut costs for the consumer.

22 hours ago, cryptotrader said:

Crypto is two sided. One side is the cryptographic and mathematical certainty which it provides - in theory you shouldn't need 'trust'.

Most people will never understand the technology and mathematical side of this just as most people do not understand the mechanics of the cash they have in their wallets.  The logical argument will not win, the emotional one will, as is always the case.  People trust cash because they trust the government and the banks to be sound institutions (although there are many places in the world where this is not fully the case - hence one reason why money will continue to flood into London and the UK despite Brexit etc).  Also they are conditioned to trust it, especially USD, Yen and GBP perhaps.  When that trust fails, as it can and has in the past, there is a run on the banks and a devaluation of the currency and worst case a return to barter and precious metals.  Humans are creatures of habit and crown behaviour is predictable in this regard.  My point is the people at large will never adopt crypto until it is mandated by the institutions they trust and is easy for them to use.  Hence it has to go mainstream, in my opinion.

22 hours ago, cryptotrader said:

A contrarian indicator to the wider market or specifically Bitcoin?

It is, for me, an indicator of the end of the wider bull market and the end of the current economic cycle.  At every major end there were many signs of euphoria, driven by the idea that the good times were here to stay.  Some people were getting very rich while the gap between rich and poor accelerated.  The zeitgeist was full of change, cultural revolution, whatever.  Crypto is just one of several such indicators for me.

Just because I don't want to trade a market doesn't mean it is not interesting and useful to track.  I don't trade the bond market but I do track 10 and 30 year US yields and the Vix and these are wider fundamentals based indicators for me.

So in summary then:

  • Overall I am negatively disposed to Cypto currency in its current guise - I think we are seeing signals of the same thing with the switch from ICOs to exchanges as people start to realise it is not the currency but the infrastructure of electronic money that will be the big play.
  • I think there will be a bust to end the current iteration, perhaps we have just seen the end of a counter trend rally, a final splurge or death throe if you will, or perhaps there is another wild peak to signal that end - don't know.  Either way trading in the kind of volatility we have and a from Bitcoin is fraught with danger.
  • I think the smart money will be in at the beginning of the next iteration and that is where the true discontinuity will become manifest as the tech becomes mainstream.
  • I think the advent of Crypto and especially the hype around it is a contrarian signal that the end of the cycle is near, but I have been of that bias for a few years now.

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@cryptotrader, check out the RealVision interview with Roy Sebag titled "No don't "drop gold" for some interesting insight into Crypto and Gold and a compare and contrast between Crypto (mostly Bitcoin) and Gold.

Worth noting that Sebag is not the usual naysayer but has actually been invested in Crypto and instrumental in BitGold, which is different in this case as it is linked to actual physical gold.  He is one of the most credible people I have heard talk about Crypto.

The key messages are similar to those we have been discussing on this thread but add the element (Ha Ha) of precious metals into that discussion with an interesting conclusion on the fate of Fiat currency, a conclusion I happen to also hold as a necessity to "fix" our broken system.  The answer is not what the Crypto preachers are talking about, although Crypto may have its place in the new way.

Would be interested in what people think about this proposition.

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