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Alex Kimani

Alex Kimani

Writer, Divergente Research LLC

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Divergente Research LLC and Safehaven.com. 

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Is $50,000 Bitcoin Possible?

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They say the key to prognostication is to sound certain even when you know very little. And few markets are capable of confounding both experts and diehard skeptics like bitcoin and crypto markets do.

If you had told the average bitcoin speculator at the beginning of 2017 that bitcoin prices would increase more than 20x before the end of the year, they would probably have laughed you out of the room.

But we all know how that went down.

Which is why recent comments by bitcoin ultra-bull Arthur Hayes that bitcoin still has a chance to hit $50,000 in 2018 should not be dismissed as preposterous.

After all, that would entail a “mere” 7.5x increase over the current price. Specifically, Hayes says an unforeseen regulatory change such as a bitcoin ETF approval by the SEC could spark a huge rally for the digital coin.

Van Eck Associates and SolidX Partners, a cryptocurrency start-up, have teamed up to attempt to bring a bitcoin ETF to market. The two claim to have resolved the issues that made the SEC reject the first ETF proposal by the Winklevoss Twins, and consequently the SEC has invited comments from interested parties.

It appears that this proposal carries a much better chance at approval than the first, which is great for the bitcoin fraternity.

But would that automatically mean another mad rally for bitcoin? I hardly think so, for the following 3 reasons:

#1 ETF Too Expensive

When Warren Buffett started buying shares of Berkshire Hathaway in 1962, they were going for just $7.50 a pop (currently worth around $60 inflation-adjusted). A little over half a century later, the company has grown so big that a single class A Berkshire Hathaway share (NYSE:BRK.A) is trading at a cool $282,000, making them the most expensive shares in the world. That’s because Warren Buffett has never agreed to split the shares, though he did introduce class B shares in 1996 which are only 1/500th the price of a class A share.

And now the anticipated bitcoin ETF is about to give BRK.A a run for its money. The ETF will be denominated in bitcoin with one share representing 25 bitcoins. That’s worth $167,000 at current prices and $1.25 million if BTC zooms to $50k. That all but assures that only bitcoin whales and the largest institutions will be able to partake in that market. Hardly sounds like an ideal situation when 99 percent of investors are locked out.

#2 Bitcoin Prices Were Rigged

Plenty of experts have attempted to perform a forensic analysis of the astonishing rally that took bitcoin prices from under $1,000 to nearly $20,000 in a matter of months. Such an analysis is a daunting proposition considering the lack of official data repositories in the industry.

Nevertheless, several have come up with pretty damning findings. A University of Texas finance professor has published Is Bitcoin Really Un-Tethered?' claiming in no uncertain terms that the crazy rally was not driven by the usual market forces of demand and supply—rather, prices were artificially manipulated. Related: Bitcoin Hash Rate Stutters After Chinese Floods

Specifically, tether (another cryptocurrency) was used to prop bitcoin prices during market downturns. The paper says about 50 percent of bitcoin moves and 64 percent for leading cryptos were manipulated:

“Using algorithms to analyze the blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. Less than 1% of hours with such heavy Tether transactions are associated with 50% of the meteoric rise in Bitcoin and 64% of other top cryptocurrencies.”

#3 Roiled by Bitcoin Futures

Bitcoin might or might not be tethered, but it certainly does not enjoy the freedom to roam like it did during its youthful days. That’s because of the role played by bitcoin futures, first introduced in December 2017.

Perhaps it’s not by coincidence that bitcoin hit an all-time high of $19,343 just a week after CBOE launched the world's first Bitcoin futures. After all, the futures gave seasoned players an easy way to short the hell out of bitcoin.

Tom Lee of Fundstrat Global Advisors says these cheeky traders have been making a killing shorting bitcoin futures and longing the actual crypto around the time the futures contracts expire.

Never say never, but $50k bitcoin in 2018 sounds like a really long shot.

By Alex Kimani for Safehaven.com

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