Lately the Bitcoin price hasn’t been moving much, at least by Bitcoin standards, and has provided a nice respite from the price parroting that we witnessed in the last big run-up. In it’s place has flourished renewed exploration and discussion regarding the technology itself, how it can be incorporated, implemented, and improved.
But don’t think for a minute that Bitcoin is going to plateau long-term around the $100+ mark. Observing the last two years, we can see that Bitcoin has two basic modes: steady-as-she-goes, and have-you-seen-my-beachball-bonkers. From late 2011 until early 2012, Bitcoin would sit still for months at a single price, occasionally ratcheting up or down depending on the news (i.e. “WordPress now accepts Bitcoin,” or “Bitcoin Savings and Trust is a Ponzi Scheme.”) It can do it! The catch is that Bitcoin only likes to chill out when nobody seems to be looking. From February to April of 2013, we experienced another “Bitcoin Unhinged” period, which is arguably finally calming down.
I would like to make a prediction that in the next phase of screws-loose-wheels-coming-off-the-trailer, we’re going to see a kind of price movement that is almost never seen in financial worlds: I’m going to call it “The Spike.”
I’ll define “The Spike” as a price movement upwards of 200% within a 1-month period, after which the price will not correct below the new level, ever.
It is essentially a reverse correction, an upside-down bubble pop. While 200% is clearly an arbitrary figure, I believe that there are 5 conditions that will eventually facilitate such a move.
1) Liquidity (or “Friction”): During the last two bubbles (“bubblettes”), Bitcoin was like a pond into which floods of dollars wished to flow. These waves of buyers were held back by the floodgates that represented the barriers to trading fiat currencies for Bitcoin on the exchanges. For every person yelling “I’m buying Bitcoin right now!” there were ten screaming “I can’t get US dollars into Mt. Gox!!!” By the time the frenzy was over, most people just retreated from the gates, dollars still in hand. Right now, while the waters are calm, Mt. Gox and new exchange entrants are tearing down the floodgates one by one, building canals and conduits that will enable unprecedented liquidity going forward. When fiat can flow more freely, Bitcoin will be capable of hitting new high water marks within breathtakingly short periods of time.
2) A Wake-Up Call: In 1933 US citizens received a wake-up call when gold was revalued from $20/ounce to $35/ounce. Granted, the analogy isn’t perfect, since in this case, the price of gold was artificially pegged to dollars, or more precisely, the price of dollars was pegged to gold. People who were paying attention to the rate of gold exports overseas were able to see that the true value of gold was much higher than $20/ounce, and if they were able to successfully retain their gold through the “confiscation” then they came out much better off on the other end. As you probably know, gold never looked back after $35, and is trading today at around $1,430/ounce.
3) Additional Milestones: So far, Bitcoin has blown through milestone after milestone in its quest to prove itself as worthy of mainstream acceptance: Dollar parity, survival after large Bitcoin scams, holding steady through a block reward halving, thriving after a blockchain fork was resolved within hours, chugging along with transactions after network processing power increased more than a million-fold in the transition from CPU to ASIC mining, and landing after each subsequent bubble upon higher valuations than before the run-up. Each milestone reached is one less in the diminishing grab bag of potential SNAFUs. Somewhere in that bag is the last milestone, the straw that will break the camel’s back and send Bitcoin into stratospheric valuations.
4) Dollar Weakness: This is related to point #2, but still deserves its own slot. Though probably unlikely, hyperinflation in the US would be devastating to lenders, savers, and bond holders. Conversely, it would be a boon to debtors, owners of commodities, and Bitcoin owners. In a hyper-inflationary environment, the violence of Bitcoin’s price movements would only be limited by the imagination of the Fed.
5) Investor Trust: After surviving two bubbles, Bitcoin is looking more and more robust. In the next run-up, the Bitcoin buyer pool will be more heavily represented by individuals who feel confident in the future of Bitcoin. The next time that Bitcoin rips open the ceiling, rather than trying to time the market and sell at the top, these buyers will have a more relaxed long-term perspective, trusting that Bitcoin will prevail as it has in the past, and will keep their coins off of the exchanges. I believe the community would label them the “strong hands,” and it’s probably not a bad term.
Trying to predict the future is a fool’s game, but it can still be fun. Observing the landscape, and recognizing the fact that Bitcoin is still a tiny drop in the financial ocean, I do believe that everything is in place for an obscene upwards move, that people will wake up and check the price, and be absolutely floored, but will refrain from panic selling. I don’t think this day is imminent, since we’re arguably still in for a prolonged cool-off, nor do I think it is inevitable. But I do think that the conditions permit such a leap, at least in theory.
What do you think? Are the crazy Bitcoin price fluctuations limited to plateaus, bubbles, and corrections, or can we also see something like “The Spike?”