Bitcoin: Near-term Outlook

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Bitcoin: Near-term Outlook

Bitcoin has been rallying in 2020, but every other large (+$5 billion market cap) crypto currency has actually done better:

  • Bitcoin ($185 billion market cap): +41% YTD
  • Ethereum ($26 billion): +81%
  • XRP ($12 billion): +44%
  • Bitcoin Cash ($8 billion): +124%
  • Bitcoin SV ($7 billion): +269%
  • EOS ($5 billion): +101%
  • Litecoin ($5 billion): +83%

That makes sense in the same way that when equity markets rally off a low point in market confidence it is often smaller cap stocks that do better. Crypto investor sentiment around “alt coins” (anything but bitcoin) was very low at the end of 2019. Tax loss selling in jurisdictions with calendar year ends (such as the US) can’t have helped matters either. And, just like the January effect in US stocks, cryptos are catching a bid in the New Year.

More fundamentally, we use 2 indicators to assess bitcoin’s value as a technology: Google search volumes (an indication of general interest) and wallet count growth (actual new users). Here is how each looks just now:

#1: Google Trends data for “bitcoin” queries:

First, here is the data for just the last 90 days:

And here is the 1-year data:

What we see here:

  • Near term interest is at a 3-month high and the lows in December 2019 line up exactly with price lows over the same timeframe.
  • Viewed against a 1-year history, however, global interest in bitcoin remains quite low. Current levels are 50% of what they were in late June 2019 when bitcoin peaked for the period at $12,600. It is just over $10,000 today.

Bottom line: rising prices always begets interest in the space, and compared to 2019 there is room for further increases.

#2: Worldwide growth in the number of bitcoin wallets.

  • Last 30 days: 1.9%
  • January 2020: 1.8%
  • December 2019: 1.8%
  • November 2019: 1.9%
  • October 2019: 1.8%

Bottom line: wallet growth is stagnant even as search interest has grown recently. That means either: 1) wallet growth will accelerate shortly as long as interest remains high or 2) existing wallet owners are responsible for the uptick in global interest, not new users. The latter explanation makes more sense to us.

Three other points worth mentioning:

  • According to reliable press accounts, China houses 65% of all the processing power used to mine bitcoin globally. Quarantines related to the coronavirus have curtailed both mining operations and the supply of newer/faster mining rigs.

    Read more here:
  • Bitcoin’s rally in uncertain times does support its claims as a “safe asset”, untethered from traditional monetary policy that tends to inflate money supply in stressful environments. Its ties to China (prior point) tighten this notional cause-and-effect.
  • In 90 days or so bitcoin will see its third “halvening”, when the number of new coins created with every 10-minute cycle will drop from 12.5 to 6.25. The last time this algorithmic change occurred was in July 2016, and bitcoin went from $615 on August 1st to $996 at the end of December. Needless to say, bitcoin holders hope history repeats itself in 2020.

Bottom line: bitcoin remains an interesting experiment in disruptive innovation, but as always we recommend only the slimmest of allocations if one is interested in this asset class. We’ve lived through too many implosions here to say anything else.