Is Bitcoin going to see a significant positive price breakout over the next 12 months (Part II)?

In the first post, I discussed the price history and volatility of Bitcoin since its inception and the finite market for Bitcoin. What other market technicals and data are helpful in answering the forward pricing of Bitcoin?

I believe most Bitcoin market technicians have now classified Bitcoin as a commodity and not a currency. This is an important distinction since the value of a commodity is determined by market performance and supply and demand versus a currency, whose value is tied to interest rates driven by macroeconomic conditions and possibly a Central Bank. The value of Bitcoin, in a mature market, will be influenced by liquidity, market acceptance by buyers and sellers, and supply and demand.

Since Bitcoin is capped at 21m and at its current rate of growth it will reach this cap in 4 to 5 years, the supply and demand influence should have a significant bearing on the future price of Bitcoin. Looking at the Bitcoin market capitalization since inception (chart below) the market cap peaked in January 2014 when Bitcoin was trading at $1,150. With the current market price in the $400 range the Bitcoin market cap is trading around $7B but with an upward sloping trend since the market consolidation in January 2015. Although $7 billion sounds like a significant number, it’s rather small when compared to other asset classes and assets within a class. By way of example, Exxon has a market cap of $300B + and Caterpillar has a market cap of $40B. So does this market remain predominantly retail or at some market cap level does the institutional player step in? The answer to this question helps with the analysis of demand and liquidity.

With a potential upside market cap of $60B (21million times $3,000), I believe this market does remain predominantly retail. If it does remain a retail asset class then we should see pretty measured price movements since significant institutional money will stay away as well as the associated volatility. Also, with any retail market there is only so much liquidity, limiting trading in the market (let alone misplaced Bitcoin and other slippage). Assuming the Bitcoin market can continue to police itself and build consistent trust with its constituency, I see the price of Bitcoin moving higher from here over the next 12 months. I only see a significant price breakout if institutional money decides that the Bitcoin market is worth the research resources or it strategically fits within their overall operations and is worth an investment. Clearly, Bitcoin and its market cap potential will keep it from replacing traditional currency, but it’s fascinating to think of how it provides “currency” for smaller markets and facilitates the growth of Blockchain.

Bitcoin pricing has witnessed substantial price volatility over the last 6 1/2 years. In July 2013, the price was hovering around $100 USD and within 6 months was trading $1,000+ USD. Bitcoin pricing retreated to below $200 USD by January 2015 and found pricing support for the next 10 – 12 months. Since the beginning of the year, Bitcoin has found a stronger bid with current pricing 100% higher at $400 + USD. Where does pricing go from here?

In theory, and I believe in practice, the outer limit for the number of bitcoins is set at 21 million. Currently there are ~15.6 million or 74% of bitcoins already mined and created. At this point there are 3,600 new coins minted daily, ~100,000/month or $1.3m/year. On a linear basis, full capacity will be reached in 4 to 5 years. Assuming bitcoin and blockchain become common place technology (both are well on their way with over $1B invested by venture capital at this point), price appreciation should (for the most part) come down to supply and demand.

In my next segment, I will look at inflation as an influencer of price correlation to determine whether or not there may be a potential for a significant positive price breakout over the next 12 months.