Whenever you hear a price prediction for an asset class such as bitcoin, gold or real estate, always look for whether the person making that call has skin - or money - in the game, to weight how believable and reliable their information is.
When it comes to bitcoin, the lines between the bulls and bears are clearly drawn. The bulls are primarily composed of early adopters, brave venture capitalists, specialist hedge funds, a few high-net-worth individuals, and millennials — while the bears are predominantly from the “old guard” of the financial industry.
For example, Tim Draper recently stated that he believes the price of one bitcoin will reach $250,000 by 2022. This, however, should come as no surprise as Draper is one of the most prominent investors in bitcoin and bitcoin startups and has a vested interest in seeing bitcoin rally to new highs.
While he was correct about his bitcoin price prediction in 2014 when he said he believed it would reach $10,000 by 2017, one may suggest that Draper is “talking up his own book”. That old Wall Street idiom refers to publicly suggesting that the investments you hold are excellent investments with the aim to have others buy into them so that their values increase. To be clear, there is nothing wrong with that and most portfolio managers engage in this practice to some degree, but price predictions from individuals with skin in the game are never unbiased and should therefore always be taken with a grain of salt.
The reverse is also true for the bitcoin skeptics who publicly state that the price of bitcoin should be zero or near-zero.
When looking at the list of financial professionals who have called bitcoin a scam or claim that it has no intrinsic value, it becomes evident that many of these individuals come from companies or sectors that are threatened by the emergence of cryptocurrencies and decentralized applications. In other words, a large percentage of bitcoin skeptics are individuals who have a financial incentive to see bitcoin fail.
For example, Stefan Hofrichter, Allianz Global Advisor’s head of global economics and strategy, recently said in a blog post that “[bitcoin’s] intrinsic value must be zero” because it is a claim on nothing and does not generate an income stream.
While Hofrichter’s argument for bitcoin’s value is up for discussion, it is important to note that Allianz Global Advisers - one of the biggest investment houses in the world - does not offer any cryptocurrency investments to its clients. Since the demand for cryptocurrency investments is on the rise, Allianz Global Advisers needs to justify why it does not provide any products in this space. Hence, there is a clear incentive for Hofrichter and his research team to conclude that bitcoin is an asset bubble and not a smart investment. Thus, similar to Draper’s price prediction, Hofrichter’s view on the future value of bitcoin also has to be taken with a pinch of salt.
Does political sentiment impact bitcoin price?
Donald Trump's swashbuckling and saber-rattling on Twitter has become the stuff of legend and his abrasive comments about political opponents, former staff, senior executives and other national leaders has brought a new element of tension into global markets and geopolitical relations.
His pronouncements on Twitter are monitored by traders around the world and can affect stock and currency market sentiment. In the case of Amazon last month, its stock declined over 8 percent in three sessions after the president first tweeted that he was looking at ways to level the playing field for the retail behemoth - though this did overlap with a broad market decline in the S&P 500.
However, it is Trump's political tangents that appear to have the most impact on confidence and sentiment and his war of words with North Korean leader Kim Jong Un roiled currency and stock markets for months, with flights of capital out of the US dollar to the traditional safe haven of gold and the Japanese yen when he started talk of nuclear buttons and calling Jong Un "short and fat".
Although not a safe haven, bitcoin as an alternative to the dollar created from libertarian values, could be seen as a gauge of the dissatisfaction with the status quo. So, when anti-establishment sentiment rises we should look for a lift in the value of the "anti-dollar", and Donald Trump's tirades could provide entry signals.
Who should you listen to in crypto?
In reality, no one really knows what the price of bitcoin will be in the future. There is no crystal ball that has all the answers. Given the number of opportunities and risks that bitcoin faces, only time will tell at what level the price of bitcoin will trade in three, five or ten years time.
However, if you want to take other people’s views into consideration when making investments, your best bet for bitcoin price predictions come from independent research analysts such as Fundstrat’s Tom Lee or Standpoint Research’s Ronnie Mas.
Tom Lee, Managing Partner and Head of Research at Fundstrat Global Advisors, has accurately predicted the price of bitcoin for several years. His latest prediction is a year-end target price of $25,000 and a price of $91,000 by March 2020. Lee’s analysis incorporates Metcalfe's Law, which states that the value of a network is the square of the number of its users, and bitcoin’s potential to become a substitute asset for gold, among other factors.
“I think this next generation of young people view bitcoin as their store of value. And if it captures 5 percent of the gold market, it's worth at least $25,000 per unit,” Lee told Business Insider in an interview in October.
Ronnie Moas, founder of Standpoint Research, predicts that the price of bitcoin will hit $28,000 in 2018 and believes that its value will eventually rise to $300,000 - $400,000. Moas bases his price prediction on the limited supply of bitcoin facing potentially unlimited demand, which could push the price of bitcoin to never-before-seen highs, among other factors.
"I don't know how much gold there is in the ground, but I know how much bitcoin there is, and in two years there will be 300 million people in the world trying to get their hands on a few million bitcoin. This mind-boggling supply and demand imbalance is what is going to drive the price higher," Moas said.
Of course one may argue that Fundstrat Global Partners benefits from Lee’s high profile and his outspoken views on cryptocurrency valuations. However, the success or failure of his company nor his career does not depend on the future performance of cryptocurrencies like bitcoin. The same goes for Ronnie Moas and his company, Standpoint Research.
Independent analysts are the best people to listen to when it comes to bitcoin price predictions. Not only are their price targets based on thorough analysis but their key incentive, as independent researchers, is to be correct with their predictions as that is what they are being paid for.