The question of the real value of crypto currencies and especially Bitcoin is re-emerging this month as the flagship currency of the crypto industry is currently consolidating its monthly gains just under the psychological $10,000 barrier.
Bitcoin bulls even go to extremes to suggest that its price would reach $100,000 in 2021 but is this pure speculation or even worse, wishful thinking, or is it based on an actual working model?
In order to assess such a forecast, a careful consideration of the basics of the model it was built on is needed, especially if the model is built on the assumption that Bitcoin is digital gold, as the ratio of new Bitcoins compared to the existing supply is impossible to manipulate, which is correct in its basic economic sense, but is taken out of the trading context of the crypto currency.
The Theory of Supply and Demand
As per basic economic theory, when there is a fixed supply and increasing demand, price would only go higher. Basic economic theory, however, speaks about tangible goods and services, not currencies that exist only as numbers on the millions of screens of the investment bank and intermediaries around the world.
Theory does not even account for the leveraging that allows for significant amounts of currencies to be bought and sold against very low real money deposits, which in fact expands on the Bitcoin supply in short terms, but enough for the sharks to enter, feed off and exit. And with the recent global trend towards regulation, the appetite for fast profits would only grow the safer the environment becomes. All this would turn Bitcoin into a plain instrument for short-term speculations.
Bitcoin: Market Expectation vs Market Reality
Any trader with some experience in trading currencies knows, market expectation is one thing while market reality something different. As trading with Bitcoin becomes more and more like trading any other currency on a margin, Bitcoin market behavior would more and more resemble the behavior of the other currency pairs and any “digital gold” hype, against common sense, would remain just that: hype.
In December, the crypto currency barely managed to test the buy zone just above $6,300 and since then it resumed a short-term rally, gaining over 40% on an annual basis, but after testing sell orders above the psychological $10,000 handle, bears managed to push it back under it.
On a technical note, Bitcoin price action is consolidating in a long-term pattern, with slightly downward pressure, but bears failed at the first attempt at the key $5,800-$6,300 buy area. If successful there, market may go into a freefall to test the major support just above the $3,000 mark.
A close above this level on the monthly chart will lure more buyers and may push Bitcoin to the next area attractive for sellers around $11,600-$12,300.