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Bitcoin Looks Likely To End The Year Around $10k
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Bitcoin Looks Likely To End The Year Around $10k

Bitcoin prices continued their decline for a second consecutive month to reach $5,755 in late June before partially reversing those losses and ending the month above $6,000. This marks a nearly 70% decline in value for the cryptocurrency from the all-time high of almost $20,000 last December, as well as a 40% reduction in value from the ~$10,000 figure seen barely two months ago.

While cryptocurrencies are notoriously volatile and have seen massive fluctuations since the second half of 2017, there has been a notable reduction in activity on the Bitcoin network over recent months. To put things in perspective, there were less than 420,000 unique addresses active on the Bitcoin network on average over June 2018 – the lowest figure since September 2016. With the average transaction volume per unique address also falling to below $800 for the month (from almost $2,600 in December 2017), the net result has been a sharp reduction in pricing.

With the decline in transaction volumes being seen across exchanges, we no longer expect Bitcoin trading activity to reach the year-end levels we previously forecast. Adjusting our forecast for transaction volumes in our interactive Bitcoin Price Estimator now leads to a year-end price target of around $10,000 – down from our earlier estimate of $12,500. The graphic below captures our base case forecast for the monthly average price of Bitcoin this year based on our estimates for transaction volume and number of Bitcoin users, and also shows a possible price range for the cryptocurrency taking into account a relatively bullish as well as bearish outlook for the rest of the year.

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 early 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 term, the good news propelled Bitcoin prices higher.

But Bitcoin prices slumped in late May when Mt. Gox dumped more than 8,200 Bitcoins on existing exchanges, and further in June when two South Korean cryptocurrency exchanges were hacked. In addition to having a negative impact on Bitcoin pricing, these events also dragged down Bitcoin trading activity, as evidenced by a notable reduction in the number of users on the Bitcoin network. This explains the sharp decline in monthly trading activity for Bitcoin from $914 million in March 2018 to just $335 million in June 2018. With investors raising concerns about the security of cryptocurrency exchanges, activity levels are likely to grow at a fairly slow pace in the immediate future unless there are notable positive developments that can mitigate these issues.

What Does This Mean For Bitcoin’s Price?

Like the price for anything, Bitcoin’s fundamental price depends primarily on demand and supply. 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 of these metrics to grow at a modest pace over the coming months. As a result, we expect Bitcoin to settle in the $10,000 range by the end of the year, as opposed to our previous estimate of $12,500.

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