Lowering Our Year-End Bitcoin Price Target To $12,500 Due To Weaker Transaction Volume Outlook
Bitcoin prices saw a sharp decline over the month of May – falling from nearly $10,000 at the beginning of the month to a low of almost $7,100. Although the cryptocurrency reversed some of its losses over the last few days of the month, there has been a notable reduction in total transaction volume across exchanges. Adjusting our forecast for transaction volumes in our interactive Bitcoin Price Estimator now leads to a year-end price target of around $12,500 – down from our earlier estimate of $15,000
The graphic below captures our base case forecast for the monthly average price of a Bitcoin this year based on our estimates for transaction volume and number of Bitcoin users, and also shows a possible price range for cryptocurrency taking into account a relatively bullish as well as bearish outlook for the rest of the year.
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Understanding What Drove The Price Fluctuations Over Recent Months
The global cryptocurrency industry has seen a flurry of new developments since December. Many of these developments had a negative impact on the growth prospects of cryptocurrencies, like restrictions by banks on the use of credit cards to buy cryptocurrencies, and calls by financial regulators across the world for caution while investing in digital currencies (with some countries even banning their use). This sent cryptocurrencies sliding in value from the all-time highs seen in mid-December 2017, as demonstrated by the slump in Bitcoin’s price from almost $20,000 then to below $6,000 in early February.
However, Bitcoin prices saw a sharp recovery over April and May, primarily because the traditional financial industry began warming up to cryptocurrencies. While Goldman Sachs became the first investment bank to start a cryptocurrency trading desk, IntercontinentalExchange (which owns the NYSE) reported its ongoing work on a new trading platform that will allow institutional investors to buy and hold cryptocurrencies. As this points to increased adoption of cryptocurrencies in the near future, the good news propelled Bitcoin prices higher.
But Bitcoin prices hit a hurdle in May due to erstwhile cryptocurrency leader Mt. Gox dumping more than 8,200 Bitcoins on existing exchanges – an event that dragged down prices sharply. Mt. Gox had also dumped more than 40,000 Bitcoins in early March (which had also resulted in a crash in Bitcoin prices). More importantly, as the Mt. Gox trustee has set a target of disposing of roughly 200,000 Bitcoins as a part of bankruptcy proceedings, more such sales are expected over coming months – something that will drag down Bitcoin prices on several occasions in the near future.
We believe this expectation has kept Bitcoin investors wary over recent months, and explains the sharp decline in monthly trading activity for Bitcoin from $914 million in March 2018 to just $429 million in May 2018. While we expect trading volumes to increase steadily going forward thanks to an increase in the number of Bitcoin users, the growth rate is likely to be slower than what we forecast earlier this year.
What Does This Mean For Bitcoin’s Price?
Like the price for anything, Bitcoin’s fundamental price depends primarily on two things: demand and supply, i.e. how many people want it vs. what is available. Demand for Bitcoin is primarily driven by two factors: the number of active users, and how much they transact. On the supply side, the number of available Bitcoins is capped, and about 80% of the capped number is already mined. As such, it is sensible to focus on the demand, both in terms of users and transaction volumes. In our interactive Bitcoin Price Estimator, we forecast changes in the number of unique users as well as transaction volumes for each month over the rest of 2018 to arrive at our estimate for Bitcoin’s fundamental value.
As we detailed above, we expect both these metrics to grow steadily over coming months – albeit at a slower rate than what we forecast earlier. As a result, we believe that Bitcoin is poised to settle around $12,500 by the end of the year as opposed to our original estimate of $15,000.
This video shows how to leverage our bitcoin pricing dashboard. While the dashboard looks extremely simple, in back-testing – a method to see how well it could have predicted prices in the past – it was almost 95% accurate.