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At the time of writing, the price of bitcoin is hovering around $7,000. Could this be the start of the next bull market? Is this just market manipulators pumping the price up to sell hard next week?
Well, to those who are looking for answers, almost assuming that someone out there has a crypto-crystal ball, I have some sobering news to deliver: the price doesn’t matter, and here’s why.
Short-term price has no reflection of fundamentals.
Let’s rewind the crypto-verse nine months to winter 2017. If you recall, rumors were swirling that China may ban bitcoin, South Korea was banning bitcoin, and scaling issues were a legitimate unknown, as the rumored Lighting Network was still vapor-ware. And yet, we were in the midst of a raging bull market. The price of crypto was rising by ten percent A WEEK, and no top was in sight.
In contrast, today we have much less uncertainty. China banned crypto, but South Korea has enacted favorable regulations, turning itself into a crypto capital. More importantly, layer 2 scaling solutions have been released and are progressing steadily. The lighting network has over 3,000 network nodes and 11 thousand network channels, and sleek real-world applications are launched.
Yet, in the midst of all this ‘bullish’ news, the total market cap of all cryptocurrencies has declined 80% from their December highs. What gives?
To sum it up, the logic is that the short-term price does not relay connection to underlying fundamentals, at all. Long term, it will, but crypto operates on speculative cycles. We have seen this pattern play out many times before. You can read a thorough analysis of bitcoin’s price history here.
TLDR: historical crypto price patterns have operated on a cyclical burst of Gartner hype cycles. As the price rises, more eyes turn towards the asset. This creates a positive feedback loop that accelerates the rise. People get FOMO, or feelings of missing out, and panic buy. CNBC flashes signs of 100k bitcoin around the corner. All news is good news. The price outstrips rationality.
At some point, the punch-bowl runs out, and the hype cycle reverses. FOMO buying turns into panic selling. Just as there is a speculative overshoot from fundamentals during bull markets, there is an undershoot during the bear market. This is the psychology of a financial asset in a bubble.
Another way to look at it is this. If it is expected that bitcoin will reach a price of over 1 million in 10-15 years, the price will need to rise 10% per month from today. Is it realistic to expect a steady price rise like that? No, once people see the potential gains, they will try to front-run the herd. This is what fuels bubbles, ‘irrational exuberance.’
In conclusion, bitcoin is an infant tech and the first new tech that has a price attached to it. If we had a ticker on the internet’s development in the early 90s, it would probably follow a similar pattern.
So relax, take joy in the fact that you are watching this play out in real-time. Consult a financial advisor to develop a sound personal investment strategy so that you don’t fall victim to FOMO buying or panic selling. HODL (hold your cryptocurrency rather than sell it), don’t be afraid of falling down the rabbit hole to learn more about this revolutionary technology and enjoy the ride.