Bitcoin Breakdown: Price Analysis, Predictions and People
Bitcoin got off to a rough start in January, but what are experts predicting for the price of bitcoin moving forward? Some might say that bitcoin is doomed to visit much lower price levels as global markets face uncertainty under the possibility that the Federal Reserve will hike interest rates. Others say that regardless of what happens on macroeconomic and geopolitical levels, bitcoin is hitting at least US$100,000 in 2022. The outcome will actually depend on a number of factors. Let’s break it down.
Price is driven by adoption
One thing that will push the price of bitcoin up over time is how much it is adopted by regular, everyday people. The more people using it as a savings technology and as a medium of exchange, the higher the price is likely to be. When people buy bitcoin as a savings technology, they are investing with intentions to keep it tucked away for the future. They’re not touching it or putting it on an exchange to be traded. This ultimately reduces the tradeable supply on the market and can squeeze the supply, creating prime conditions for a characteristically aggressive price rise. Any way you slice it, more people using bitcoin in this way means there is a higher likelihood that the price of bitcoin will rise. It is simple supply and demand economics and provides the possibility for bitcoin to reach new all-time highs under the right circumstances.
Then there are those who use or wish to use bitcoin as a medium of exchange. These are typically individuals who want to get paid in bitcoin, want to pay for goods and services at restaurants and retail stores with bitcoin, and are willing to dedicate time to explain how everything works and set people up with a wallet. This cohort is critical for awareness. These are the boots-on-the-ground, die-hard users who have put all their faith and confidence in bitcoin as a currency and are the missionaries for the Bitcoin movement. Bitcoin adoption and subsequent price increase is not just about new capital coming into the market, it’s about people.
Stock to flow is broken
A once-reliable chart called stock to flow (S2F) model previously used to predict and model the price of bitcoin is breaking down. It was one model that people would quote when they predicted bitcoin would reach US$100,000 by August 2020. Then the same model was quoted for predicting US$100,000 by December the same year. Both of these dates came and went with bitcoin not even coming within 30% of the target. Although the model may have been reliable before, it appears that the price of bitcoin is now detached from the predictions forecasted by S2F. What seems to be the case is that bitcoin is more attached to macroeconomic events that also influence the regular stock market. Although this is a sign of maturity for Bitcoin, it is also an annoyance for bitcoiners who insist that bitcoin is uncorrelated to the movements of the stock market.
Now that bitcoin is significantly detached from the S2F model, and tracing the Nasdaq and S&P 500 more closely, all bets are off. Although bitcoin has strong previous support lines formed at US$32,000 and US$28,000, it is not out of the realm of possibility for bitcoin to break these supports and visit lower levels. The real wildcard is whether or not bitcoin will drop below its previous macro all-time high of US$20,000. Never before has bitcoin broken a previous macro high and then fallen back below it.
Cautious optimism
I have cautious optimism about the short-term future of Bitcoin. I think good things will happen for Bitcoin in 2022, not necessarily in terms of price action, but in terms of adoption. There are positive developments taking place that will move Bitcoin further into the cultural zeitgeist, theoretically driving more people to buy it. The number of cryptocurrency users is continuing to rise year over year. The mayors of New York City and Miami are both taking their salary in bitcoin. There is a bill in the state of Arizona to make bitcoin legal tender. At the same time, the International Monetary Fund is recommending El Salvador stop its Bitcoin experiment, and an official from the European Securities and Market Authority says Europe should put a ban on bitcoin mining. This is my case for cautious optimism; metrics and indicators are trending in a positive direction, but price could falter in the short term by attracting the wrong kind of attention from regulators.