Bitcoin 2017 : A Currency Devaluation Hedge for Emerging Markets
Since I wrote my “Bitcoin Awakening” post in April, Bitcoin has moved from trading in the $400's to the verge of breaking $1,000 in 2016. This is the first time since 2013, as I had forecast in that blog post — and to be even clearer, I said that it would hit $15bn market cap this year. This happened today at $934 and when I had made the original forecast, it was about $1,000 as fewer coins were in circulation at that point, as I have detailed in this blog post.
Disclaimer:
Before I break down my thoughts for 2017, I wanted to point out a couple of things.
I tweeted this out at the start of December:
In total, Bitcoin spent less than 48 hours in the $800 zone, after trading sideways for weeks in the $700's. Apart from the usual troll tweets responding to this tweet, I also received some flattering responses here:
As much as I’m flattered by the attention and the emergence of nicknames such “Bitcoin Oracle” (Thanks to TwoBitIdiot for coining it!). I do feel the need to make a point of two things, in particular.
Firstly, I don’t have a crystal ball, and everything I say has a certain percentage chance of either occurring or not occurring — we live in a probabilistic world, so when I make a call, it’s because I think the outcome is highly likely, but that does not always mean it’s certain.
Secondly, I’m a macro guy — big picture focus. I don’t look at the trading charts every day (I just don’t have the time!) and even though I don’t actively trade anymore, I do understand things like leverage, slippage and liquidity in markets quite well. I don’t do technical analysis as macro factors will shift the playing field and disrupt the charts so in my opinion, they are often best used for looking back, and not forward.
Most of my calls are based upon fundamentals that I observed from my working knowledge of capital flows, supply & demand, and other fundamental perspectives on economics, psychology, money, business, game theory and a host of other subjects — including life experiences and the differences between living in South Africa and the USA (capital controls, hyperinflation leading to Zimbabwe’s currency collapse, high interest rate environments, etc). If you have read my prior posts, you will find this to be the case when I lay out fundamentals for why I believe things in the Bitcoin world will play out the way I forecast or suggest. This is not wizardry or crystal ball stuff; it’s just observations that I have made from analyzing lots of disparate data and information derived from multiple sources and then trying to figure it all out. And, sometimes I will be wrong.
The late 2016 price surge:
Bitcoin has performed particularly well over the past month, for 2 primary reasons. The first is largely due to the macro economic factors — demonetization in places like India & Venezuela, geopolitical concerns over the Trump election and its impact worldwide, and most importantly, but- most misunderstood and not often cited- the recent fed rate hike which puts pressure on emerging market currencies, strengthens the dollar and in turn creates a surge in the forex/BTC trading price. This in turn creates additional foreign buying and demand for Bitcoin as a forex hedge, particularly outside the US, because the price of Bitcoin in that country is rising quickly.
The second factor is that after the $800 price mark was breached, there was a hollow supply interval between $800 — $900 (i.e. not a lot of sellers, for various reasons which would take too long to explain in this post). This triggered an effective short squeeze and pushed the price above $900 very quickly. We will most likely find a potentially short period of consolidation around low $900's, before we start testing the 4 digit barrier, potentially with one or two mini spikes to the mid $900's and then a sell off back into the upper $800's/low $900's as the market finds its feet after skipping a beat through the $800's. There is also the year end impact of profit taking around December 31, but I don’t expect it to be outside these ranges.
Dollar interest rate hikes driving Bitcoin price up:
As I alluded to in the previous point, the fed interest rates impact Bitcoin to a degree that most people will not grasp. This is a topic for a much longer post, so I will need to be brief here. Essentially, the higher the rates go, the higher the demand for Bitcoin will be. The divergence that you see is happening because Gold has been heavily favored by Gold bugs for historical reasons (in times of crises, etc) as the go-to commodity based store of value if an economic collapse happens, etc — which was often followed by a period of low interest rates and then inflation.
Inflation is just not happening in the US, due to Quantitative Easing. As a result, Gold is still overvalued, especially if the fed now continues to raise rates, which I expect will occur. Bitcoin will rise with an interest rate hike because unlike Gold, there is further upside in the capital value of Bitcoin, so the need for some type of yield to offset it is greatly reduced.
When the fed raises rates, emerging market economies have their currency devalued, which raises the effective price of Bitcoin for people in those markets, creating more equity value in their Bitcoins and driving up demand for more. This is because the price to mine a Bitcoin is largely uniform (electricity price, aside) in every country in the world and it’s a commodity that trades freely across global markets — labor input costs are not germane to Bitcoin, unlike Gold. If your currency devalues, it just costs you more to mine a Bitcoin or buy a Bitcoin. The market doesn’t care how your currency is performing.
Some would argue that Bitcoins don’t provide yield similar to gold and therefore should be subject to the same price pressures that rising interest rates impact gold, but the reality is that the current market capitalization of Bitcoin is fractional to gold and so, for the time being, the expected capital appreciation of Bitcoin heavily discounts the need for a yield curve right now. This may change in the future.
To expand on fed monetary policy a bit more, the world has been on a dollar based debt binge for assets and equity over the past 8 years, with record low interest rates, which partially explains NIRP in some countries (watch RealVisionTV.com for more detailed info here). When rates rise, entities (corporates or governments) have to then make interest rate payments in USD and they then have to sell local currency in order to do that, which in turn weakens the local currencies even more — effectively trying to close out a dollar short position on a regular basis. This is over and above any unwinding of carry trade positions that are no longer profitable with higher cost dollars — a vicious cycle ensues. Bottom line is that rate hikes devalue foreign currencies and strengthen the dollar.
This is particularly visible in countries where entities with local currency earnings have been financing dollar denominated debts without sufficient dollar based income. Bitcoin is seen to be gaining in local currency price trading pairs, which makes it far more desirable and in effect increases demand, because of upward price momentum in those currencies which creates more demand for Bitcoin.
Without a doubt, Bitcoin will rise further next year. I expect to be within the $3k range by the end of next year, as I have previously forecast.
I would compare the last price spike in 2013 to $1255 as being “irrational exhuberance,” similar to the peak of the dot.com bubble — so I don’t expect another one like this again, but I could be wrong. Similarly, the tech world eventually crushed those “bubble” highs once the technology and businesses matured and built towards higher and even more sustainable highs, post 2000. Since the previous high for Bitcoin, it has been over 3 years. A lot has changed. I spoke about this in some detail during my TEDx Talk in 2015:
I will write a follow up post which expands on some of the topics above in greater detail, but for now, I will summarize my expectations for next year.
What to expect in 2017 for Bitcoin:
Reasonably low volatility (for Bitcoin), maybe a couple of dips here and there, but a steady pace of growth.
More broader industry use cases and applications for Bitcoin. My company, Civic, is building out a Blockchain based identity platform and I’m very excited about the prospects of using a public ledger for global identity management (and no, we don’t store your personal info on the blockchain!).
Government sponsorship or endorsement of Bitcoin related companies and more likely, government led buying of Bitcoins or investment into Bitcoin mining companies or similar.
Potential government crackdowns on Bitcoin in certain countries, due to capital flight or loss of exchange controls. This will drive up the Bitcoin price in the black markets in those economies.
I do expect a 2 -3x price growth overall in 2017 for the USD/BTC pair. This may result in Bitcoin prices in other currencies being up 4 -7x, but I think it’s fair to say that USD/BTC pairing is what we should use as the benchmark.
Segwit will be adopted to handle scaling.
What NOT to expect in 2017 for Bitcoin:
Parabolic growth (not 20x) (i.e. Bitcoin $10k is probably not going to happen in 2017)
A hard fork. We all saw what happened with Ethereum so I would give this a 5% chance of happening.
Consumer adoption — this is still trailing, and I don’t believe we’re going to see mass adoption of Bitcoin as a currency of any sort by average consumers. I would still argue that Bitcoin is a commodity today, not a currency. That will change in time.
Special thanks to @viviedi, Craig Montuori, Zach Herbert and Andrew DeSantis for proof reading the final draft!
