Bitcoin 2018: Prepare for Major Value Crashes

For bitcoin, 2017 was a year like no other. The digital currency not only recorded unprecedented gains, it single-handedly ushered a new asset class that is becoming the first real alternative to fiat currency in the modern era.

Charting Bitcoin: 2018
For all the euphoria of the past 12 months, the path forward won’t be easy, strategists warn. With bitcoin prices reaching unheard of levels, the fear of missing out is proving too strong to resist. In finance, herd mentality is rarely a viable (or even successful) long-term strategy.

That was one of the key messages Wall Street analyst and founder of DataTrek Nick Colas conveyed last week when he argued that bitcoin would see wild fluctuations over the next 12 months. In his estimation, bitcoin can conceivably trade between $6,500 and $22,000 over the course of 2018. In the process, market participants can expect several “crashes” of 40% or more.

“Bottom line: bitcoin can rally to $22,000 and still be reasonably priced, or plummet to $6,500 and also be correctly valued,” he told CNBC. “We expect to see bitcoin trade for both prices in 2018.”

Bitcoin is in the process of becoming a “great alternative currency,” says Bubba Trading strategist Todd Horwitz, but getting there will be a long and painful process. For holders of the digital currency, this means more “dramatic falls” in value.

In an interview with Bloomberg, Horwitz said: “I would think that the bitcoin price is a bit of a bubble and I think you will see some more dramatic falls. But anytime we see dramatic falls you also see dramatic rises as the buyers try to get back in.”

He added: “I do believe the cryptocurrency space is here to stay and I think it’s going to be a great alternative currency that’s going to be used.”

Major Themes for 2018
Several major themes will influence bitcoin’s price trajectory this year, chief among them being the regulatory landscape governing cryptocurrency. South Korea – arguably one of the most favorable jurisdictions for trading cryptocurrency – is in the process of implementing new regulations aimed at curtailing speculation. The strategy includes barring people from opening new crypto accounts and from trading anonymously. Top policymakers in the country have also said they are not opposed to shutting down crypto exchanges should the new regulations fail to deter speculation.

In the United States, securities regulators are carefully evaluating the burgeoning ICO market for suspicious behavior. In 2017, the Securities and Exchange Commission (SEC) shut down The Dao token for security violation. The regulator also warned against ICOs endorsed by celebrities and scams that use the crowdraise model to lure investors. In response, the SEC has created a new cyber unit to police ICOs and bring them to justice, where necessary.

Evolving regulations and uncertainty about the future have placed considerable strain on the crypto market. In September, China issues a blanket ban on crypto exchanges and ICOs, triggering a massive correction. Other nations are still feeling their way through the asset class, with the likes of Russia and Kazakhstan calling for state-backed cryptocurrencies.

In addition to regulation, the debate over blockchain scalability will continue to influence investor sentiment. Disagreement over bitcoin’s existing protocol has led to multiple coin splits, including the now famous bitcoin cash fork. A few months later, bitcoin gold would also emerge following disagreements over the mining process.

The performance of altcoins will also be top of mind for investors in the new year, as many alternative cryptos begin charting their own path away from bitcoin. It should be clear by now that bitcoin no longer holds the same position it once did as the de facto king of the crypto market. Today, bitcoin accounts for less than 40% of the total market share for cryptocurrency, down from roughly 90% at the start of 2017.

Of course, there are many positive developments that are working in bitcoin’s favor, and will continue to do so throughout 2018. The launching of bitcoin futures on CBOE and CME has been heralded as a major achievement in bringing cryptocurrency to the mainstream. With Nasdaq expected to follow suit, investors will have plenty of options to bet on bitcoin using more traditional financial vehicles.

CBOE has also filed to list several bitcoin futures ETFs. If approved, the digital currency will be accessible to millions of investors through traditional retirement accounts.

Debates over bitcoin’s future are typically ideological as much as they are value-based. The general view on Wall Street is that the digital asset class as a whole is significantly overvalued, with many arguing that bitcoin has no intrinsic value and thus cannot be evaluated. Yet others, like Tyler and Cameron Winklevoss and John McAfee, believe bitcoin can still grow many factors above its current level.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.