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Trading Lesson: Bitcoin's True Value Zero? Are We Crypto Perma Bears?

09/20/2018 2:07 pm EST

Focus: CRYPTOCURRENCY

Avi Gilburt, Esq

Founder, ElliottWaveTrader.net

The perspective that most have about bitcoin ranges from complete lack of knowledge to utter certainty that it will change the world. There are no true fundamentals for analysts to even try to value it based on traditional methods, say Avi Gilburt and Ryan Wilday.

That certainly has not stopped everyone from providing their opinion based upon their feelings.

Yes, most of what you see presented on the valuation of bitcoin (BTC-USD) is nothing more than the analysts’ feelings.  In fact, I read an article a few days ago which provided the perfect example of this phenomena seen in the cryptocurrency market. 

Geoffrey Caveney provided us his feelings about bitcoin: “When I say there’s a good chance the bitcoin price will be below $1,000 by next year, I understand that good chance is not a precise phrase. Here is a more complete explanation of what I mean, in two paragraphs that will not fit in a headline: If we had a guessing game, and we had to guess what will be the lowest price range bitcoin trades at during the rest of 2018 and all of 2019, my guess would be around $900 to $1,000. I think it's about 50-50 whether the actual low price will be above that or below that.”

 So, it seems analysis about bitcoin has now come to the point of simply guessing and attempting to package it as analysis. 

However, I have to note that the most accurate statement I read in that article was not by the author, but by one of the commenters: Bitcoin has value because we say it does. A shiny yellow piece of rock in the ground has value because we say it does. MONEY has value because we say it does.”

The operable statement in this paragraph is because we say it does. This is why we say that market sentiment, which is clearly not rational, drives stock and market prices much more than fundamentals do.  In fact, market sentiment drives fundamentals as well, and I have outlined that causation chain in a prior article.

John Maynard Keynes recognized that emotion drives the market more than rationality or fundamentals when he famously stated that “the market can remain irrational longer than you can remain solvent.”

So, when you want to understand price, you need to understand market sentiment as being preeminent over any means of valuation, and especially over guessing.

Ryan Wilday, who wrote this article with me, is a man who has lived and worked in Silicon Valley for many years, and sees value in cryptocurrency. But he doesn’t bet on or guess its value. Rather, Ryan analyzes market sentiment when he wants to identify price direction and turning points. 

The transparent inflation rates, versus the Fed’s hidden printing press and the protection of one’s assets from the banking machine, are some of the common reasons many buy bitcoin and assign it value. Ryan agrees in these as principles, but it doesn’t tell us how to value bitcoin, as these principles are too subjective. They may spark warm and fuzzy feelings about bitcoin, but they don’t tell us when to buy or when to sell. 

It leaves us clearly wanting for any fundamental perspectives of how might we try to value bitcoin. Do we look at the cost of mining? In May, Fundstrat posted that the breakeven point for bitcoin miners is $8,038. Mining costs are probably higher than that now, and yet bitcoin has traded under that level for months. When will the market reward miners again? Maybe this market is not thinking about miners?

What about transactions on the blockchain? Does this tell us when we should go long and short bitcoin? Willy Woo and Dimitry Kalichki had both worked on indicators that value the price of bitcoin based upon transactions on its chain.  Woo produced the original indicator and Kalichki modified it to make it more responsive.

And, it seemed to work for quite some time. However, right now the indicator is saying that bitcoin is growing more overvalued as its price declines because transactions are decreasing. 

Does this mean we should all be bitcoin perma bears? This method seems very logical to Ryan, but if transactions are declining much faster than price, Houston, we have a problem! Well, if you believe this is how we should make trade decisions, we also have a problem. 

I can imagine one comparing bitcoin price against M3 money supply to achieve an intrinsic value. The issue we encounter is that Bitcoin has been accelerating faster than M3 and is so volatile that there is no relation to that curve. And, are market participants really thinking about M3 when the they buy bitcoin? Probably not. 

The last method Ryan finds interesting is watching whale wallets, those wallets with large holdings. One method involves watching inflows and outflows of those wallets. Large outflows are supposed to be bearish, especially when the counterparty is an exchange. The second method of watching whale wallets entails watching how many bitcoin remain dormant on the sell side but are taking transactions. In this regard, we have a very bullish phenomenon. The net balance of these wallets has climbed all year, with some continuing to take inflows with no outflows. And, yet, the market hasn’t turned.

I think the point we are trying to make is that there is no true valuation methodology which accurately applies to bitcoin.  Moreover, “guessing” clearly is not going to be a reliable manner in which one should be making any financial decisions.  Yet, being able to track market sentiment through Elliott Wave analysis has been a wonderful way to be able to track price and seems to be the most accurate (and maybe the only) way to track the Bitcoin market.

Avi Gilburt is a widely followed Elliott Wave technical analyst and founder of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

Ryan Wilday is host of the Cryptocurrency service at ElliottWaveTrader.

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