In a Pantera Capital research letter the CEO of Pantera, Dan Morehead, compares the price action of Bitcoin with major stock indices. Morehead believes there are parallels between Bitcoin’s price and the NASDAQ composite - when it was in a bubble phase, and subsequent crash during 2001-2002.
The NASDAQ composite tracks the price of technology stocks traded on the NASDAQ exchange, and experienced a huge bubble and subsequent burst during the dot-com mania of early 2000s. Only recently, after almost 13 years, has the index reclaimed its all time high around 5000.
Bitcoin price has been highly volatile, affecting several companies that deal in Bitcoin. As Bitcoin’s price fell from a high of almost $1200 to a current price of around $250, a lot of money left the space – leaving only the well capitalized companies to compete. Several Bitcoin exchanges have closed shop, and startups are finding it harder to raise money as investor enthusiasm subsides. The parallels between Bitcoin price and the NASDAQ during the dot-com boom and bust seem justified.
"The NASDAQ composite topped 5,000 on March 2nd, up 350% from its 2002 low. The S&P 500 is up 210% from its 2009 low. And at $270, bitcoin is up 57% from just two months ago."
— – Dan Morehead
The BitIndex’s Steady Rise
Instead of being fixated on the price, which is usually quite unpredictable in the short run for a new concept like Bitcoin, Pantera instead provides a BitIndex – which is supposed to track the overall progress in the Bitcoin space. Pantera tracks this on their website, and the information and criteria are public. The BitIndex uses several inputs, from Bitcoin mining Hashrate, to Social Media and Developer Interest, and Google Searches.
From November 2013 to February 2015, all the constituents of the BitIndex have increased in value, except Google Searches – which are down 9%. The value of the BitIndex itself has increased 90% in this meantime, although a huge percentage of that change can be attributed to the Hashrate (which has seen a 9820% increase in this time frame).
Considering all the constituents, Pantera believes that developer interest, user adoption, and merchant adoption are the three most important leading indicators of Bitcoin’s medium-term success. User adoption is measured as the number of active wallets, but it is hard to know the exact number of active users, especially since several popular hosted wallet services like Coinbase don’t publish their transactions to the Bitcoin blockchain – when the transfer is within the Coinbase wallet ecosystem.
Pantera also believes that from a regulatory perspective, Bitcoin is at a much better place today than it was even 6 months ago.