Bitcoin 2018: Tailwinds Should Trump Headwinds, Say Top Analysts

Following a feverish 2017, Bitcoin (BTC) should continue to rise in 2018 according to Canaccord Genuity’s top analysts Michael Graham and Robert Young. “While we find it easier to identify a greater number of potential headwinds for BTC value in 2018 (which should lead to event-driven volatility), we think the tailwinds will generally prove more powerful,” say the analysts. However, the complex currents at play should also result in volatility and event-driven opportunity for investors happy to up their risk profile.

“At a high level, we expect continued tension between 1) the idea that BTC is likely still very early in its lifecycle and therefore should appreciate considerably over the long term; and 2) the reality that it is very difficult to identify transactionally-driven demand sources for BTC at present.”

Bitcoin is not a fraud

JP Morgan CEO Jamie Dimon now says ‘the blockchain is real’

We now enter 2018 with Bitcoin the world’s fifth largest currency and a market cap of $229 billion. As a result, the currency is now a widely recognized legitimate economic force only nine years after it was first launched.

Even JP Morgan CEO Jamie Dimon now says he regrets calling bitcoin a ‘fraud’ back in September. And while it is true that various countries have not been receptive to the digital currency, Bitcoin is still very much a ‘global’ phenomenon. At this point the US only accounts for about 38% of bitcoin’s overall volume, followed by Japan and South Korea.

However, in contrast to the diverse geographical spread, bitcoin ownership is actually extremely concentrated. Recent reports suggest that about 40 percent of bitcoin is held by only around 1,000 users- known as bitcoin whales. These ‘whales’ can cause serious volatility for the currency by selling even a small portion of their holdings.

But is the value justified?

Bitcoin experienced a whopping 1370% increase in value last year. But for skeptics who are worried that Bitcoin is a bubble waiting to burst, the analysts suggest that BTC’s current valuation can be supported. However, “it requires capturing ~4% of primary payments use cases and ~20% of the gold market by 2025.” Notably the analysts conclude: “This seems ambitious without significant scaling progress (faster & cheaper transactions).” Plus it is very difficult to establish any kind of ‘valuation floor.’ In fact, it will be interesting to see how the bitcoin community tries to solve important scaling solutions in 2018 and beyond. This is crucial for BTC to become a more viable payments solution.

These factors could cause Bitcoin to rise:

For now, let’s take a closer look at the various bullish and bearish factors that the analysts see playing on bitcoin in 2018. In respect of the tailwinds boosting bitcoin, investors can look forward to:

1) The entry of well-funded institutional investors. Specifically, we are looking at over 100 cryptofunds that together manage around $3-4 billion. According to the analysts, “many of these funds provide a way for institutions to gain exposure to cryptoassets (including a wide variety of utility tokens) that would otherwise be difficult within institutions’ stated investment parameters.” As a result, the bitcoin futures market should become a lot bigger in 2018, following the launch of bitcoin futures by the Cboe and CME in December;

2) The continued rise of popular interest (‘nothing draws a crowd like a gold rush’ says the firm).  For example, leading cryptoasset exchange Coinbase demonstrated an exponential increase in interest in 2017, even peaking as December’s #1 iPhone app;

3) Scaling initiatives to make transactions quicker and cheaper even in the face of rising demand. Notably, Coinbase announced in December that it is planning to implement scaling initiative SegWit in 2018. Segwit splits transactions into two segments to optimize space but has so far shown limited uptake. Meanwhile, the analysts are also excited by another upcoming solution called Lightening Network. This effectively creates payment channels to enable “off-chain” transactions between two users; and

4) Upcoming forks to the bitcoin blockchain. Following discussions with miners and industry participants, the analysts say, “we believe there will be several attempted additional forks in 2018, creating the possibility of a series of “special dividends” and therefore potentially supporting BTC’s value.” However, the analyst cautions that a small number of powerful miners could work together to implement more forks than ever before. The danger is that this will create ‘trust’ issues on the network.

But watch out for these potential dangers:

Talk of increased regulation in South Korea is spooking Bitcoin investors

On the flip side to these tailwinds, there are also significant potential headwinds on the horizon. These include:

1) Crypto / ICO regulation. Increased regulation remains a critical risk for cryptocurrencies, with the US’s SEC yet to provide an official position on bitcoin and South Korea eyeing new regulations to limit crypto speculation; 2) Mining inefficiencies like the large amount of electricity required to power the bitcoin mining; 3) Slow current transaction speeds of about 66 minutes to confirm a bitcoin transaction at a cost of $26 per transaction; 4) Miner concentration with about five main miner pools; and 5) The rise of alternative cryptoassets.

For example, Dash already boasts faster speeds and lower fees than bitcoin while Ripple has already signed partnerships with 100 financial institutions. Bitcoin transactions are also more traceable than some users would like, hence new more anonymous coins like Monero and Zcash. And the situation could amplify in 2018: “As new cryptoassets continue to launch in 2018, offering sometimes superior features to bitcoin, BTC may see its market share decline” says the firm. On the other hand, it is also possible to imagine that if regulation for alternative cryptoassets steps up, BTC could become a digital currency “safe haven”.

Top analysts worth tracking

Given so many different factors at play, it is clear that the outlook for bitcoin in 2018 is anything but certain. Nonetheless the ultimately optimistic (on balance) tone of the report may be encouraging to investors. Finally, it is worth drawing attention to the authors of the Canaccord Genuity report. We looked up the two analysts behind the report on TipRanks and found that both analysts have strong track records. Michael Graham is ranked #160 out of 4,750 analysts tracked by TipRanks while Robert Young comes in at #296. Young, for example, boasts a 76% success rate and 16.5% average return across his 108 stock ratings.

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