This PDF will help guide entry and predicts that 2020 will be an important year, and thus to establish a bitcoin position in 2019. Below is background information on why the newly-launched Lightning Network is key to bitcoin’s success – something that has not been widely discussed. We also cover the halving of bitcoin to occur in 2020 (and how this affects price), and the potential market cap for bitcoin to help put our price target in perspective.
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Bitcoin: 2019 Analysis
INTRODUCTION:
Bitcoin has been covered on my free blog to make the following points:
• SEC-regulated institutional trading is on the horizon
• Global unrest will help establish bitcoin as a safe haven
• The Bitcoin protocol is too important for the development of all cryptocurrencies for the United States to take direct action against the token and/or protocol. If the United States wants a Fed coin, preventing further development on bitcoin would be counterintuitive.
My previous series provides a good base for understanding the potential for bitcoin.
This PDF will help guide entry and predicts that 2020 will be an important year, and thus to establish a bitcoin position in 2019. Below is background information on why the newly-launched Lightning Network is key to bitcoin’s success – something that has not been widely discussed. We also cover the halving of bitcoin to occur in 2020 (and how this affects price), and the potential market cap for bitcoin to help put our price target in perspective.
SECTION 1: August 2019 Update
Since writing on bitcoin in July, Bakkt has made progress and is slated to launch bitcoin futures on September 23rd. Here is an excerpt from my original coverage on what Bakkt is and why it’s important to track:
“Jeff Sprecher, the Chairman of Intercontinental Exchange (ICE) and Founder of the New York Stock Exchange (NYSE) and many other exchanges internationally, aims to create a federally-regulated crypto ecosystem. The consortium includes Microsoft, Starbucks and the Boston Consulting Group, who are working together to help leverage ICE’s trading infrastructure and to cater to retail investors, institutional investors, and consumers. This could help baby boomers put their 401K into bitcoin, and pave the way for bitcoin-backed ETFs or mutual funds.
Bakkt plans to launch its physically-settled bitcoin futures products for testing in July, according to the company’s blog post. At the core of Bakkt is the custody of digital assets for institutional clients. The first solution will be physical-delivery bitcoin futures traded on a federally regulated exchange and clearing house.
The trades will happen on ICE Futures US (IFUS) and will be cleared on ICE Clear US (ICUS). Bakkt will provide regulated custody as the company has filed with the New York Department of Financial Services for approval to become a trust company and to serve as a Qualified Custodian for digital assets.”
Bakkt will also store bitcoin for institutional investors as an in-house custody solution with insurance of $125 million, which has been another missing piece for institutional interest.
Notably, Starbucks’ payment app has more users than Google Pay or Apple Pay, which paints a bright future for Bakkt to open up a separate arm for digital payments in the future.
China’s yuan also made news recently as China was accused of being “a currency manipulator.” Bitcoin’s price went up during the volatility and the economic uncertainty around foreign currencies (and perhaps someday, the dollar) was proven to be a catalyst for bitcoin. We saw more evidence that crypto, which is a non-sovereign, and highly secure digital store of value, will likely be leveraged during future recessions.
SECTION. 2. Lightning Network & Market Cap
2A. Lightning Network
Perhaps the only thing more turbulent than bitcoin’s price is the acceptance of bitcoin as a payment currency. During the most recent bitcoin selloff in Q3 2018, bitcoin payment volume dropped 80% from a high of $427 million to a low of $96 million, according to a survey of 17 bitcoin payment processors.
To help stability, bitcoin payments need to be faster and cheaper. The lightning network was recently launched to address the issue around how many transactions per second the bitcoin network can handle. Prior to the lightning network, bitcoin was capable of processing about 7 transactions per second. This creates a serious lag, and transaction fees are prohibitive for frequent payments. Visa, for instance, processes about 24,000 transactions per second with a peak capacity of up to 50,000 transactions per second.
The Lightning Network is a “Layer 2” payment protocol that operates on top of cryptocurrency blockchains, and enables fast transactions. The users of the Lightning Network dedicate a funding transaction to the base blockchain, known as Layer 1.
Instead of keeping a record of every single transaction that occurs, the Lightning Network enables users to log records only when a payment channel between two parties is closed. This two parties to create a multi-signature wallet and conduct numerous transactions outside of the main blockchain and record them as a single balance when the payment channel is closed.
Once the Lightning Network is more built out, you will be able to pay people you are connected to without setting up dedicated channels. This network will be used for small transactions that don’t require the security of the bitcoin network. Large transfers that require decentralized security will continue to take place on the original layer.
The final iteration for the Lightning Network will be the cross-chain atomic swaps, which will exchange crypto tokens between different blockchains without the need for a crypto currency exchange.
Benefits of the Lightning Network:
• Transactions will take place on the Lightning Network channels and outside of the blockchain:
• Fees will be minimal to non-existent for small payments like coffee, dinner, and local stores.
• Quick transactions no matter how busy the network is. The transactions will be instantaneous and able to keep pace with Visa, MasterCard and Paypal.
• Cross-chain atomic swaps will eliminate the need for separate crypto exchanges. The first tests of crossblockchain transactions functioned well and this is currently undergoing more testing.
• The Lightning Network can reach 1 million transactions per second.
As of now, the Lightning Network is very new to the market with the first white paper published in 2016 and interoperable test transactions performed in late 2017. By 2018, The Lightning Network concept was endorsed by Jack Dorsey of Square and Twitter, and the network had a growth rate of about 15%. The number of nodes increased from 1,500 to 3,000 and the number of channels increased from 4,000 to 11,000.
The concept of the Lightning Network (LN) has been proven, however, the technology is undergoing development and not ready for deployment yet. Bitcoin’s transaction fees could rise, causing the cost of LN to rise. For instance, if one billion people use LN, the fees will rise to cover the scale.
Additionally, the funds must be stored online, which is considered to be less secure than off-line cold storage. There’s also the potential for Fraudulent Channel Close, which occurs when one party closes the channel and pockets the funds while the other party is offline.
The remaining hurdles that the Lightning Network must overcome will likely be solved through the pool of developers working on the network. This phase, when bitcoin moves beyond being an investment and becomes a currency used for transactions, will greatly increase its value and market cap.
2B. Bitcoin’s Potential Market Cap
It’s hard not to miss the headlines that predict bitcoin will reach $100,000 or $250,000. These numbers are hardly fathomable considering bitcoin was worth less than $1 about a decade ago. The problem with these headlines is that the growth may seem appalling (to anyone not invested), but the market cap projected by 6-figure bitcoin values is in line with what bitcoin is setting out to achieve.
• Priced at around $10,000, bitcoin has a market cap of $200 billion, or the size of Oracle or Salesforce.
• Priced at $50,000, bitcoin will have the market cap of Apple, Microsoft, Amazon and Google.
• Priced at $250,000, and bitcoin will have the market cap of gold, a safe haven asset that protects against inflation and economic uncertainty.
My prediction is that once the Lightning Network is built out, bitcoin will surpass the market cap of Apple, Google, Microsoft and Amazon to reach a minimum of $50,000 per token. This is because the protocol solves critical needs for global populations, including the reduction of financial fees for 7 billion people, and offers a need to store money during times of inflation.
Bitcoin is based on the most secure network in the world, and this solves a very real need for the financial system – which cannot be automated without a decentralized blockchain solution. Technically speaking, bitcoin is also the world’s most secure financial network. The transfers eliminate 3% in processing fees and hedges against inflation. This can, and should be, worth as much as a search engine, enterprise software, a social media network, warehouse fulfillment (AMZN) or iPhone hardware.
Apple, Google, Microsoft and Amazon reached market caps of $1 trillion because their products scale to global populations and are required on a daily basis. Bitcoin not only scales to the global population but it also protects their livelihood – a necessity rather than a convenience. In fact, we see populations who are not necessarily tech savvy most enthusiastic about bitcoin, and this is a strong signal that it will scale beyond the reach of $1 trillion market cap.
Once bitcoin hits our target price, we will take some gains while remaining invested through a minimum of 2025 until digital payments are popularized.
SECTION 3. Bitcoin’s Halving
This is a preliminary report on bitcoin halving. A blog update will be released in Q4 2019.
Bitcoin is limited algorithmically to 21 million bitcoins, which makes it a deflationary asset instead of an inflationary asset. Every ten minutes, a “block” of bitcoin is added to the blockchain. Miners are rewarded with bitcoin and the new distribution of bitcoin is known as a “block reward.” The block reward in the beginning of bitcoin’s existence was 50 BTC. Now it is 12.5 BTC. This was due to bitcoin halving which occurs every four years and will continue until the last bitcoin is mined until approximately 2140.
To date, 17.6 million bitcoin have been created, representing 84% of the total supply.
In May 2020, bitcoin will go through another halving and the block reward for miners will decrease from 12.5 to 6.25. This will be the third halving event in the network’s history. One of the main purposes of halving is to preserve the economic principle of scarcity for bitcoin, which with a peer-to-peer financial network, reinforces bitcoin’s potential.
According to recent surveys, 32% of bitcoins in circulation have remained in the same wallets since July 2016, and therefore, this is new territory for many holders of bitcoin. Historically, the last two halvings produced returns of 81x from the first halving and 3x from the second halving in the one-year period that followed.
The trick to bitcoin halving, historically, is that the price becomes extremely volatile. We saw from the first halving that bitcoin went from $11 to $1,100 and back down to $220. The second halving went from $230 to $20,000 and back down to $4,000. extremely volatile. We saw from the first halving that bitcoin went from $11 to $1,100 and back down to $220. The second halving went from $230 to $20,000 and back down to $4,000.
Prudent investors will recognize the potential here as the new support levels that follow halving are much higher than prior support levels.
CONCLUSION:
If you’ve read this far, then the question on your mind is likely entry. This is by far the most important question for bitcoin (rather than the viability). This is due to the painful volatility of cryptocurrencies. Even with Bakkt’s announcement, bitcoin met resistance in the high $10Ks and dropped back down to support to the low $10Ks in the matter of a couple of days.
As you’ll see below, putting a very small amount into bitcoin now is good insurance (10-20% of your position). We believe there is a high probability that bitcoin’s price will retreat one more time, and this will the final opportunity for reasonable entry (80-90% of position). This scenario comes from scouring many technical analysts on this topic and being very diligent in our scenario recommendations.
We realize we could be wrong and bitcoin could rally – which is why some insurance keeps you in the digital asset. If you are concerned this could be the case, consider buying 20%-25% insurance now.
Recommended Reading:
Bitcoin Futures & Custody: Bakkt’s differentiated Approach
Lightning Network: Wikipedia
The Next Bitcoin Halving – Grayscale Insights
SECTION 3: Technical Analysis
Provided by Knox Ridley
BITCOIN UPDATE:
Bitcoin is currently in a correction off its June high around $13,880. The price is currently below the volume weighted moving average, which is anchored to the June high, noted above in black. This tells us that the bears are in control for now, and will remain so until broken. However, the 200-day simple moving average is in purple, and tells us that the long-term bull market for bitcoin is still in-tact and healthy.
Typically, during the first retrace off the first initial push into a new bull market, I’ll target the 50%-61.8% retrace of the initial move higher as entry. However, based on the strength of this bull market, I’ve moved my target between $8500-$7700. When we hit this target, we will update you on the probability of a 50% retrace to $6,600, although right now, the probability of hitting this retrace and the $6,000 support is lower than it was in June/July due to the bullish activity.
Finally, Bitcoin is currently trading in a corrective wedge, which is highlighted in the dotted blue lines. There are 2 possibilities for this move, which are shown with the green and red arrows. Simply put, either Bitcoin has bottomed, breaking through the wedge and initiating a new uptrend, or it breaks-down below the wedge testing support along the way.
Internal Strength:
Before we get into the likely scenarios of Bitcoin, I’d like to highlight the strength of this uptrend for context. The Relative Strength Index is my favorite measurement for the strength of the current price trend.
I highlighted two increasing trends in the RSI, which coincide with the 2 most recent uptrends in Bitcoin’s price. You’ll notice the first dotted red line in 2017. The RSI followed this trend until it diverged from the increasing price, signaling weakness, and then broke the trend line. The price immediately broke through the 40 line on the RSI, which initiated the internals into bearish momentum. Through-out the recent bear market, the RSI mostly stayed below 50.
Today, we have a similar uptrend, highlighted by the second red dotted line. The price broke through this trend, signaling the current retrace we are still in. However, instead of breaking the 40 line, the RSI has respected this support level, which is showing that the buying pressure for Bitcoin, though not in a bullish stance, is also not entirely bearish either. This is signaling strength within this correction. If we break the 40 line and then go through the 30 line, it will be worth noting.
Entry Scenarios:
First, it’s crucial that you adhere to proper position sizing with an asset like Bitcoin. It is extremely volatile asset. Proper position sizing is crucial, and should lean to the lower end of a portfolio allocation. Because of our conviction in the long-term growth of Bitcoin, we suggest layering your investment starting at today’s prices. Possibly, 10-20% of your Bitcoin allocation in today, and based on how shallow the current correction is, we will add into support or momentum at key levels.
Scenario 1: Bitcoin continues lower. If Bitcoin breaks the $9040-$9,000 support, which is in black on the chart, we will likely see it trade between $8500 – $7700. There is an open gap around $8500, which, once closed, will likely act as support. Below this gap, you’ll see a long-term price cluster around $8195 (shown in black). When you factor in the 38.2% retrace around $7700 as the next level of support, we will have exceptionally strong support between this region. Once again, I think the likelihood that we fall to the 50% retrace around $6600 is unlikely in this uptrend. However, if we do break the long-term price cluster around 6000 (also highlighted in black), I’ll target the 61.8% retrace around $5500.
For now, I added to my position at $9,000 and look to be a heavy buyer sub-$8000. However, anything is possible with Bitcoin, which is why we will want to wait for a renewed uptrend to initiate the full position. Save the bulk of your allocation for when we get a strong bounce off major support levels, followed by a 5-wave impulsive move. That will signal an end to the correction.
Scenario 2: Bitcoin breaks-out higher. If we see a move above $13,880, it would signal that the correction is likely complete, and we are now entering the next leg higher. Remember, we are attempting to get Bitcoin at a reasonable price for a long-term holding.
We want to be in Bitcoin before the fundamental thesis Beth outlined with Lightning Network and potential market cap becomes a popular view. So, we don’t want to over think an entry, while at the same time respecting the volatility of this asset and the likelihood of a pullback.
Technical Analysis is all about probabilities, and it is a snapshot of where we are today. This can change, which is why we recommend a circuit breaker in the form of a stop. If your stop. is triggered, look to re-enter in a new uptrend. However, because of the volatility of Bitcoin, and until we are definitely in the next leg up, I will likely use a deviating stop based on price action and support, which will move up with the price of Bitcoin.
Blog updates will be provided as we go along.
The Big Picture
It’s undeniable that Bitcoin (BTCUSD) is in a renewed uptrend. Earlier this year, Bitcoin found major support around $3,125, and began to make higher highs and higher lows for the first time in over a year. Even though Bitcoin is a relatively new asset that inherently lacks many of the valuation methods commonly used in security analysis, it still adheres to the laws of human sentiment, which is evident within the decade long price action in Bitcoin.
That being said, Bitcoin’s price over the last 3 years experienced a global focus that road the waves of extreme sentiment in both directions. The historic bull run and the bear market that followed, succinctly aligned with Fibonacci ratios, typically used in Elliott Wave Theory. We can thus extrapolate an on-going wave structure, which aligns with these important ratios in order to gauge an approximation of the likely price action going forward. Because of this, I will lean on Elliott Wave Theory to gauge a long-term framework for Bitcoin’s likely path.
Once we have a Wave 2 in place, we can then find our Fibonacci extensions as a likely target for future moves. The red number on the graph above are not random. They assume a correction to the 31.8% retrace around $7800. From here, the math takes us to a minimum of $65,000-$75,000 region, with the likelihood of extending higher.
Elliott Wave Theory is just one tool amongst many used to gauge likely targets, but based on the data we have today, this is a high probability path. Not only does the product research line up, but so do the technical, which is always exciting to see.
I want to put this graph in front of you so that you can get an idea what we are after.Entry is crucial, but in light of where we both see Bitcoin going, we don’t want to over complicate it too much, and simply want to invest in this opportunity.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.