Appendix

Appendix

Popular Conceptions About Price Trends


Is there more at work than self-fulfilling prophecy?

Historically, Bitcoin and other cryptocurrencies experience periods of rapid appreciation after challenging social, engineering, or regulatory hurdles have been cleared. This has been the case for the UASF soft fork of 2017, various technical integrations, and the launch of CBOE futures. Time-based milestones also bring investors into the market, perhaps as a result of the Lindy effect.[264]

As a result, Bitcoin’s “halving” events, in which the emission rate of Bitcoin paid to miners is reduced automatically by the network in periodic intervals, produce price appreciation as well. Accumulation has held relatively constant for 9 years, but volatility is characteristic, and it is unknown how the market will react once the emission period has ended and all 21 million bitcoin are in circulation. In this appendix, we discuss the levers which are widely perceived to move spot prices.

Factors driving retail speculation

Privacy concerns have become mainstream since proof of government spying was revealed in the U.S. by Edward Snowden in 2013.[265] The number of Internet users and tech workers is growing, and people are concerned about who may view their data. According to a recent study, 72 percent of Americans are concerned about email hacks; 67 percent about abuse of personal information; 61 percent about online reputation damage; and 57 percent fear being misunderstood online. [266]

Hollywood may be helping feed the online paranoia. The struggle of technologists against bureaucratic management has turned into a cultural trope. Cypherpunk culture has benefited from the mainstreaming of its stories and concepts with films (and remakes) like “Tron,” which extends the ideas about cyberspace pioneered by dystopian cypherpunk novelist William Gibson.

In his 1984 story “Neuromancer,” Gibson reveals the concept of “the Matrix,” a place where human memory and perception is mechanized in a virtual reality system.[267] This film too has cultivated paranoia about the use of monotechnic megamachines to achieve unethical and immoral ends.

Popular conceptions about price

Portfolio managers generally combine fundamental analysis and technical analysis when assessing equities. As we have discussed, “fundamental analysis” for cryptocurrency investors is a matter of evaluating developer draw and hardware draw. But because bitcoin trades like any other commodity, it is worth addressing the way market participants generally approach bitcoin price and trading.

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Figure 24: Prediction through August 2019.
(Credit: Fujibear on TradingView)

The “Price Channel” Theory

Traders generally adhere to a few ideas about the trend in Bitcoin’s price, which may or may not be self-fulfilling:

  • That its shapes are repeating “fractals.”
  • That it exhibits Wyckoff Market Cycles. [268]
  • That its deflationary emission rate causes regular price increases, particularly acutely in response to halving events.
  • That its value will generally increase over time.

In this section we explore are a variety of charts which depict commonly-circulated ideas about future trends. We do not endorse these predictions but present them as anecdotal evidence of views within communities of traders.

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Figure 25: Halving and price, up to present day.
(Credit: BusinessInsider)

The Halving Theory

Many traders believe that price action is driven by Bitcoin’s automated and periodic “halving” of the coinbase reward paid to miners for finding blocks. The halvings are the reason that bitcoin is said to be a deflationary currency. Every few years, the network automatically adjusts, based on predetermined variables, to paying miners exactly half of the block reward they received previously.

Miners are notorious for holding back their rewards, perhaps in an effort to contribute to illiquidity and drive up prices. Presumably, they must liquidate some rewards periodically to reduce risk. The price threshold at which miners are willing to liquidate to reduce risk may increase dramatically after halvings, which may or may not produce the price effect demonstrated in the chart above. Many versions of this chart circulate. Below, another halving-and-price chart:

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Figure 26. Color-coded chart showing the distance between halvings relative to Bitcoin price.
(Credit: @100Trillion on Twitter [269])

The Hype Cycle Theory

Bitcoin’s promise as a self-organizing micro-economy is not well understood by the retail public, but its promises are routinely co-opted and oversold by charlatans looking to cash in on Bitcoin’s technical narrative.

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Figure 27. 2011-2014 “hype cycle” price chart, based upon Gartner’s Hype Cycle.
(Credit: Wikimedia)

Some traders believe that, as Bitcoin makes increasing progress in terms of its reliability, liquidity, and general efficacy, it creates new opportunities for charlatans to sell an increasingly obvious future to non-technical investors. Above, a chart showing the way price coincides with periods of media hype, highlighted in blue.

The Hashrate theory

Retail cryptocurrency investors tend to assume that miners join a network when it is profitable to mine, but there may be some evidence that the relationship between network hashrate and price may work in an opposite way.[270] Vitalik Buterin of the Ethereum project has built a series of hashrate-price estimators that attempt to measure Bitcoin price endogenously.[271]

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Figure 28. Bitcoin price charted against hashrate, 2010-2014.
(Credit: HashingIt.com)

This counter-intuitive relationship may be more rational than it appears; when a network is new, the network token is nearly valueless. Yet if the development team and the code shows potential, miners may contribute hashrate to the network on a speculative basis, before the coin is even listed to trade on exchanges. The growth of the Bitcoin hashrate despite downward price pressure seems to validate the hypothesis that miners mine in anticipation of future value, not in order to liquidate rewards right away.[272]

The Fractal Theory

Other more superstitious traders seem to believe that Bitcoin price patterns recur in fractal patterns, along various intervals.

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Figure 29: Comparison between 2014 (left) and 2018 (right).
(Credit: TradingView).

Summary

In this section we’ve sampled some of the theories behind Bitcoin price action. While miners control liquidity of newly-minted coins, large swaths are also held by speculative holders, many of whom profess undying commitment to long positions. While there is reason to be believe the Bitcoin network will grow in value over time, it’s impossible to say whether the recent mania experienced in 2017 was a unique event, or the continuation of a larger and longer trend.