• Agris Gruzdas

What is going on with Bitcoin? Regulation, trends and price expectations.

There are many articles, comments and remarks out there covering buzz about whether it’s worth it to invest in cryptocurrencies, Bitcoin, Ethereum or other cryptos and how new regulations might affect the BTC etc. Acknowledging the importance of all this, I would like to dig a bit deeper and talk about how to actually use crypto in daily life. Can I actually use Bitcoin as an equivalent of dollars or euro to buy something and not just sit there and occasionally look up on your screen and re-evaluate your state of mind?

Well, this is a rather broad and very exiting topic, so, I will cover this cryptocurrencies issue into two or three blog posts. In this article I will talk about latest news on regulation of cryptos and how this will impact the whole industry, some important trends and what to expect in the nearest future.

So, I won’t go into details what is Bitcoin and why somebody should get one. There’s plenty of material out there if you serious about it. I suggest Investopedia as a good starting point for that.

Let’s start with recent (13th of January) announcement of Christine Lagarde, the President of the European Central Bank (ECB), calling for global regulation of Bitcoin and closing any loopholes for money laundering activities.

I believe that some sort of regulation on Bitcoin is inevitable. After all this is only a logical step for further promotion and integration of the asset into society. Formal regulation will only strengthen the recognition of BTC. Bitcoin is not a scam. How could it be when it comes to capitalization worth more than 600 billion at the time while I’m writing this?! And once regulation will be introduced, it will open the door for asset managers (imagine all the funds, insurance companies etc.) to officially buy this asset. Furthermore, the regulation will help various institutions (e.g., PayPal) integrate cryptocurrencies into their system, making a huge step towards further cryptocurrencies’ integration in daily routine, and forming a new habit for many consumers.

Since US banks are allowed to hold BTC, the Prime brokers now have a pool of new opportunities open to investors. For example, the insurance giant Massachusetts Mutual already has acquired Bitcoin assets worth of 100 million dollars.

Why is this so important? Insurance companies are very heavily regulated, they cannot invest in any place they want. Besides, insurance companies are among the largest money holders in the world. Here are some data from STATISTA.COM

When you see such important players enter the market, it must be said that BTC's market capitalization is still far too small to meet the demand. And I believe that this is just the beginning of the influx of institutional money into the crypto environment.

Speaking about meeting the demand. Look at another interesting fact: what is the real turnover on cryptocurrencies? The popular site COINMARKETCAP.COM indicates that the 24h turnover is about 68 000 000 000 USD. Well, this is not true. Simply because many stock exchanges are unregulated, indicating a false trade volume. Most likely the actual sales volume is ten times lower than claims. More detailed information has been made by Bitwise Asset Management team and can be found here. I suggest you take some time to get yourself acquainted with that material before you dig deeper into crypto world.

Another common myth – money launderers and other criminals use Bitcoin. Firstly, the blockchain is a public database where any transaction is stored. Thus, anyone can track any payment if there’s real need to do so. Of course, it's a bit more complicated than that, but in any case – it’s traceable. Secondly, the FBI has already demonstrated its ability to track BTC transactions.

Nevertheless, the criminal world will always look for ways to move money around. Just google it and see how many banks are involved in various money laundering scandals. So, the banks still are the main money laundering tool for criminals today.

Talking about trends. Let’s have a look at the growing popularity of Bitcoin on Google Trends. There’s a big peak at the end of 2017. And now, with the rise in BTC prices, popularity is also returning.

There are other variables we need to consider, besides Google Trends data, though. One of the characteristics is the number of active BTC addresses since each address is like a bank account or wallet where movements take place.

As we can see, active addresses have repeatedly reached their peak. An even more interesting picture emerges if we look at the number of addresses with balance with 1k of BTC or more:

Here we can see that the price increase looks quite different, comparing to previous years. In the previous hype of 2017, as prices rose, the number of addresses declined, thus showing partial fixation. This time the number of addresses steadily increase along with the rise of price. This is a good indicator of market sentiment.

Another interesting indicator is “Realized Profit” which is calculated as follows: Realized Profit denotes the total profit (USD value) of all moved coins whose price at their last movement was lower than the price at the current movement. And at the moment it looks like this:

It looks rather bearish to me, like a price adjustment would be expected. And if we are already talking about the price and its forecasts, then the popular BTC price calculation is the "stock to flow ratio". The Stock to Flow (S/F) Ratio is a popular model that assumes that scarcity drives value. Stock to Flow is defined as the ratio of the current stock of a commodity (i.e. circulating Bitcoin supply) and the flow of new production (i.e. newly mined bitcoins). Bitcoin's price has historically followed the S/F Ratio and therefore it is a model that can be used to predict future Bitcoin valuations. This metric was first coined by PlanB. For a detailed description see this article. So, the calculation / forecast for BTC looks like this:

According to this model, the price after the last “halving” (A Bitcoin halving event is when the reward for mining Bitcoin transactions is cut in half. This event also cuts in half Bitcoin's inflation rate and the rate at which new Bitcoins enter circulation.) is projected at 55k USD. And the market capitalization of 1 trillion. And I must admit that it has been a very accurate forecast, published on 22 March 2019.

And now, two years later, we have almost exactly reached the forecast targets. Of course, this Stock-to-Flow ratio model cannot be taken as a general reference point or as a "carved in stone" forecast. However, this method has its own logic.

As for the Bitcoin price as such, the BTC's long-term graph looks like this:

At the moment Bitcoin experiences it’s third parabolic movement. Frankly, I don't even really know if any other financial instrument has experienced so many parabolic movements, and each of these parabolas has ended with a drop of 80% or more….

When zooming in and looking at it in more detail, the BTC now forms a triangle on the graph:

  • In technical analysis, a triangle is a continuation pattern on a chart that forms a triangle-like shape.

  • Triangles are similar to wedges and pennants and can be either a continuation pattern, if validated, or a powerful reversal pattern, in the event of failure.

As we can see, the triangle is knocked down, indicating a potential correction. And as we know, the adjustment within 50% is a norm for Bitcoin. Usually in a growing, Bull market, “alt-coins” grow as well, with BTC adjusting, and we can see that this time as well: Ethereum (ETH), the second largest cryptocurrency, is making a breakthrough against BTC. In general, looking at the overall dominance of BTC, we can see that BTC is also experiencing an adjustment. Look at this picture:

Bitcoin now has more than 60% of the entire cryptocurrency market. In the previous Bull market, “alt-coins” played an important role, accumulating a large mass of money. If BTC was once the only and dominant cryptocurrency currency, then, starting from the beginning of 2018 this dominance ratio was only 40%, until people realized that many of these "alt-coins" did not live up to their expectations and converted their funds back to the BTC. Still, there are many new players who crave to get a part of this lucrative “pie". Will the BTC's dominance decline again? I think so, because there certainly will be many more new, serious projects that will eventually win a place under the crypto sun. I’m rather convinced about that. The only question remains – how long it will take?

Stay tuned for my following article about BTC and cryptos!


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