Whatever Doesn’t Kill Bitcoin Makes It Stronger

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Whatever Doesn’t Kill Bitcoin Makes It Stronger

Our most basic thesis on bitcoin is this: every day it doesn’t die, it gets a little stronger. That has nothing to do with price levels, mind you. It could go to $1,000 and its market value would still be $16 billion – a “Unicorn” 16-times over, in VC-speak. It would, in other words, still be relevant to any long term analysis regarding the intersection of money and technology.

Our stated price estimates for bitcoin this year – $6,470 to $21,000, midpoint $13,735 – gets some grief on social media but we hold to it. Approximately right beats precisely wrong in our book. The thought process behind that range:

  • It is based on the total value of $100 bills in circulation ($1.2 trillion) plus high denomination euro notes ($697 billion). Both the Federal Reserve and European Central Bank have been increasing their issuance (popular press accounts notwithstanding) of these notes in response to persistent global demand.
  • Bitcoin, in our opinion, is an electronic form of such notes and offers similar private and portable wealth storage.
  • Depending on how many individuals around the world accept bitcoin as another method of wealth storage, bitcoin will increase or decrease in value.
  • Price volatility – bitcoin’s party foul, as it were – scares away adoption over the short term. Conversely, recovery in prices gives confidence to long-term holders and puts some steel in the backbone of potential buyers.

That sets up an important question: now that bitcoin has rallied from $6,200 to over $9,000 this month, will we see incremental global interest and adoption start to reaccelerate? Here is how we track each, and some thoughts about current trends:

Global Google searches for “bitcoin”. Before someone opens an online wallet account or considers a buy/sell decision, they will search for general information online. Google Trends counts the number of times users search for “bitcoin”, making it our go-to resource for interest in the crypto currency.

Based on the latest data available through today, Google searches for “bitcoin” are basically at 3 month lows. Recent spikes in searches coincide exactly with near term price bottoms (January 17th, February 6th). As prices recover, however, interest drops off rapidly.

What we look for (and are not seeing) is greater Google search interest on rising prices. We’d love to think that individuals search for bitcoin when it declines in order to buy at lower prices, but human nature doesn’t work that way. Very few people run towards the lion…

Growth in wallet count. The best way to explain bitcoin’s move over the past year is to look at the growth in the number of wallets (data from blockchain.info):

Second Quarter 2017

  • Wallet count growth by month: April 2017: 3.8%, May 2017: 5.8%, June 2017: 5.2%
  • Average wallet growth (simple average, not compounded): 4.9%
  • Bitcoin price change in Q2 2017: +114%

Third Quarter 2017

  • Wallet count growth by month: July 2017: 4.8%, August 2017: 5.1%, September 2017: 4.5%
  • Average wallet growth: 4.8%
  • Bitcoin price change in Q3 2017: 67%

Fourth Quarter 2017

  • Wallet count growth by Month: October 2017: 5.6%, November 2017: 6.7%, December 2017: 10.7%
  • Average wallet growth: 7.7%
  • Bitcoin price change in Q4 2017: 203%

The upshot here: when wallet growth accelerates (as it did in Q4), bitcoin sees dramatic appreciation. And, as it turns out, probably too much. January’s wallet growth of 5.7% – better than the typical month in Q2/Q3 of last year – was not enough to hold up prices. Bitcoin fell 26% last month.

So far, February is looking even worse for wallet growth. Month to date (through the 13th) there are just 1.4% more wallets, so at current trends we’re probably looking at no more than 3% wallet growth for February 2018. If that’s the final number, it would be the worst print in 12 months.

Pull the recent Google Trends data together with wallet growth, and bitcoin’s fundamentals (and future price path) becomes clearer. If it is washed out and prices can rebound, we’ll see it in the Google Trend data just as we did last year (December 2017 was the peak for online searches and bitcoin prices). This should translate into renewed wallet growth (also a peak in December 2017).

In stock market terms, bitcoin is a momentum trade; not a shock, we know. But now you have the fundamentals to understand and monitor the transmission mechanisms. To succeed, it needs to regenerate the public attention that drove Google search interest and wallet growth last year.

Back to our opening thought: bitcoin’s price recovery doesn’t have to be this week or this month. Whenever it is, and whatever the fundamental cause (i.e. more regulatory certainty, greater financialization), as long as it still exists it has proven its power to hold the imagination.