Don't Expect New Bitcoin Price Highs in 2018

Despite an already six month cool-off period, for 2018 we see more sideways and downside potential in the bitcoin price due to sluggish retail demand, hesitation from institutions and a current market cap that seems too high relative to the activity occurring on available blockchains.

Many investors and advisors are on record stating that $5,700 was the bottom in bitcoin for this year, and that higher prices lie ahead. While we are very bullish on bitcoin's long-term prospects, we do heed caution for more short-term price optimism.

To find the starting point of the historic parabolic rally in bitcoin that ended at $20,000 we have to go as far back as August 2015, when bitcoin traded at below $200. This past rally was a stupendous, historic move.

Since January, the bitcoin mining hashrate has tripled, which means that a huge amount of new or more efficient mining rigs have come online.

The assumption here is that bitcoin's market value is mostly derived from it being a network that connects users around the world: the more people and entities use the bitcoin blockchain to settle transactions, the more it acquires the liquidity and utility that we'd expect from digital gold.

The related NVT ratio, which tries to measure if the daily dollar value of all bitcoin transactions is relatively high or low versus the market cap, also suggests overvaluation.

The bitcoin price has already come down by 62 percent since December.

Bitcoin dominance is gaining ground, which we think indicates the market's slow realization that there's a large moat around the bitcoin ecosystem now which will make it hard to dislodge.

The 2015-'17 rally was historic but not entirely unique for this ecosystem: between late 2011 and April 2013, the bitcoin price multiplied by 100x, and, after a six-month correction, it multiplied again by 10x. Value investors are already anticipating the May 2020 block reward halving, which will cut down bitcoin's annual supply inflation from 3.7 percent to only 1.79 percent.

We don't foresee new all-time highs in bitcoin for 2018, and unless data starts suggesting differently, we are expecting mostly sideways or lower price action.