Bitcoin’s Outlook as the Year Draws to a Close

Could bitcoin soon touch $8,000? Although it’s hard to say what could happen in the near future, I think it’s likely bitcoin (or BTC) will rise in the long term. Famous investor Tim Draper made a similar long-term bitcoin price prediction. His bold prediction has been the center of discussion among many crypto communities. Do you think his prediction will create tailwinds for the cryptocurrency?

Bitcoin price trends in 2019

BTC prices are gaining once again. In this year’s first half, bitcoin was on a bull run and touched $13,000. BTC started the year at $3,739.36 and grew by almost 3.5 times from January to June. The trend reversed in the second half of the year, and the price sank to $6,600 by the second week of December. Even after the recent bear run, bitcoin is still up close to 98% year-to-date.

The tide is changing again, and bitcoin could close 2019 on a higher note. BTC crossed $7,200 on December 18, and then moved above $7,500 on December 22. Since December 17, bitcoin is up 15%, and some market veterans believe it could rise further. As of the end of December’s third week, bitcoin’s market cap had doubled through 2019, from $65 billion to $135 billion.

Venture Capitalist Tim Draper on BTC

Tim Draper expressed bullish views on bitcoin in an interview. Draper is a venture capitalist and the founder of Draper University, Draper Venture Network, and many other ventures. Draper is known for picking good investment opportunities. Some of his investments include Tesla, Twitch, Baidu, Twitter, and cryptocurrency portal CoinBase. Many sources reported on Draper’s 2014 crypto investments. In 2014, Draper bought 30,000 bitcoins during an auction by the US Marshals office. CNN reported that Draper made the deal above the prevailing market rate. At the time, he invested around $19 million, which rounds off to approximately $630 per bitcoin.

During an interview on The Daily Exchange, Draper made a bold prediction about bitcoin prices based on several fundamental and technical factors. Industry experts Brian Kelly and Tom Lee corroborated his predictions on CNBC’s Fast Money with technical analysis of their own. Kelly is the founder and CEO of BKCM, a crypto investment company, and Lee is the co-founder of Fundstrat Global Advisors. Let’s look at the industry experts’ comments in detail.

What the $250,000 bitcoin price in 2023 means

Draper made a bold prediction that bitcoin could cross $250,000 by 2023. Reaching this price would mean an increase of around 33 times and compound annual growth of around 222% in three years. Speaking on Fast Money, Kelly agreed with Draper’s prediction of $250,000 per bitcoin. After accounting for the approximate 18 million bitcoins in circulation globally, Kelly stated that, at this rate, bitcoin’s market cap could touch $4.5 trillion, around half the value of gold worldwide.

Most of these analytics are geared toward veteran crypto investors. Coders or developers might seek more clarity on crypto investing’s technology, while venture capitalists may rely solely on technical charts and price patterns.

A word of caution

Even though the above predictions look rosy, there are huge risks. Past bitcoin price trends are a primary factor in making forecasts. The fundamental functioning of the exchange and trading volumes also affect cryptocurrency estimates. Investors should have some understanding of what drives crypto pricing before investing in cryptocurrencies to make informed investment decisions. Do not fear missing out. Unfortunately, the dissemination of information isn’t streamlined, and many crypto exchanges are unregulated, another area of concern for investors. To understand Draper’s bold prediction, we need to understand how bitcoin works and how bitcoin prices move.

Understanding the design of bitcoin mining and supply

How would you react if I told you that the bitcoin supply is going to fall with each passing year? I’m not talking about bitcoin’s trading volumes but its supply. Let’s untangle this confusion. A cryptocurrency is mined by crypto miners, and these mined currencies are then traded on crypto exchanges. Bitcoin creator Satoshi Nakamoto designed the cryptocurrency to adjust its supply over time.

There’s an upper cap for the number of cryptocurrencies in circulation. In the case of bitcoin, mining will stop after 21 million coins are in circulation. One reason for this capping is that the infinite supply of a resource tends to affect the asset’s price. Commodities such as gold and other precious metals, base metals such as iron and steel, and oil and natural gas have a finite supply. The value of these natural resources increases as their reserves reduce. Bitcoin works on the same fundamentals.

Comparing commodity mining and bitcoin mining

Unlike mining for commodities, bitcoin mining takes place virtually, on a blockchain network. Network participants, or miners, solve complex calculations and execute algorithms to create new digital coins. All stored transactions on the blockchain network are encrypted and then clustered in blocks.

When a miner finishes computations for one block, a new block is added to the network. The network links the new block to the previous one to form a chain, called a “blockchain.” In simple terms, mining new blocks and encrypting transactions manage the supply of bitcoin.

In return for solving complex calculations, miners are rewarded with bitcoins. The mining reward works as an incentive for mining new blocks in the network. Initially, the computations in the bitcoin network were elementary. Over time, the calculations became more complex, and the bitcoin mining process more difficult. However, rewards were halved.

Bitcoin rewards halve over time

Halving happens when 210,000 new blocks are added to the bitcoin blockchain network. I would rather not get into the math here, but in simple terms, we can compare the process to commodity mining. When a new gold reserve is found, the mining output is high. But as we keep mining, the output deteriorates, as the mine has a limited supply.

Similar is the case with bitcoin. When bitcoin mining started, miners received 50 BTC for mining one block. When the number of blocks reached 210,001, the mining reward halved from 50 BTC to 25 BTC. After 420,001, the prize further halved, to 12.5 BTC, which is the current mining reward. The number of blocks is nearing 630,000, and when this number is reached, the reward will reduce to 6.25 BTC. BitcoinBlockHalf.com estimates the next halving could happen in May 2020. At that time, smaller miners might merge or leave the mining pool altogether.

The whole process of bitcoin mining is changing. As the bitcoin supply is capped at 21 million, miners could take several years to mine all of these bitcoins. According to Investopedia, BTC mining could continue until 2140.

While mining rewards are halving, bitcoin prices are rising, keeping miners going. As we said before, supply scarcity drives commodity prices higher.

Bitcoin price movements keep mining alive

The first time the bitcoin blockchain reached 210,000 blocks was back in November 2012. At the time, bitcoin prices were around $11. But within a year, the value of one bitcoin rose by 100 times. In the first week of December 2013, bitcoin prices crossed $1,000 for the first time. After this milestone, prices dropped, but BTC was still trading 25–30 times higher than it was in 2012. As the price of one bitcoin rose significantly, miners found it lucrative to continue mining even though the bitcoin reward had halved. As new miners contributed to the network, supply fell as demand increased, stabilizing the price of bitcoin.

The next wave came in July 2016, when the block count touched 420,000, and the bitcoin reward halved for the second time. This time, bitcoin was trading above $650. Over the next six months, bitcoin prices rose, crossing $1,000 again in February 2017. From there on, the digital currency kept climbing and touched an all-time high of $19,783 on December 17, 2017. The price rise, equivalent to 133% compound annual growth (or 30x) between November 2013 and December 2017, was so monumental that it seemed bitcoin could reach $20,000.

Mining and processing needs

As we’ve discussed, the complexity of computations for bitcoin mining become more tedious with time. Another important point in understanding mining is processing power. Solving these complex problems needs more computation power, and therefore faster processors and graphics cards. Graphics cards designed for gaming became scarce as miners began using them to mine virtual currencies. In fact, Nvidia (NVDA) and Advanced Micro Devices (AMD) faced a graphics card supply shortage.

As new processors and hardware are expensive and consume a lot of power, miners face increasing overhead costs. These increasing costs have made bitcoin mining more expensive, forcing smaller or part-time miners to step out of the mining pool. People still interested in mining have consolidated and mobilized their resources to reduce their individual overhead costs. In such cases, miners share their mining rewards on a pro-rated basis. For miners who have continued mining independently, the cost per bitcoin has increased. To compensate for the higher costs, these independent miners ask for a higher price per bitcoin on the exchange.

Therefore, bitcoin’s fundamental design keeps shifting its price higher. Demand and supply determine the virtual currency’s transactional price.

Moore’s Law and bitcoin’s design

Now that we understand the correlation between crypto mining and the need for processing power, let’s look at how Moore’s Law applies to crypto mining. Moore’s Law, named after Intel chairman emeritus Gordon Moore, has to do with processor speeds and computational powers. The law suggests that every two years, the number of transistors on a chip doubles, thereby increasing performance and power efficiency. It also suggests the cost of processors will decline as nodes shrink. In a nutshell, you pay less for a faster processor.

Furthermore, when generational shifts in processor technology improve processing power by 50%–100%, a crypto wave comes. The last big wave came in 2017, a year after Nvidia and AMD launched 14nm (nanometer) GPUs (graphics processing units). Nvidia’s Pascal GPU jumped two generations ahead. It delivered twice the performance as its Maxwell-based predecessor, the Titan X. However, it consumed one-third of the power and cost 40% less.

Tech companies will continue to innovate to satisfy the neverending demand for computing power. As computing power improves, bitcoin mining will increase. Their complexity will grow, and so will the price per bitcoin.

Bitcoin set for regulatory acceptance in 2020

In a way, 2019 has been rewarding for the crypto community. And I’m not just talking about BTC or ethereum prices. Federal governments are accepting the popularity of virtual currencies among Millennials, studying cryptocurrencies’ application and impact on domestic economies.

In October, CoinDesk reported that US regulators had approved the Bakkt crypto exchange, which will support bitcoin futures trading. Also, on December 21, Forbes reported that the US Congress decision to finalize the Cryptocurrency Act of 2020 could attract more crypto investors. Forbes got its hands on a draft of the bill, which splits digital assets into three categories:

• Commodities, which will be regulated by the Commodities Futures Trading Commission.
• Currencies, which will be regulated by the Treasury through the Financial Crimes Enforcement Network (or FinCEN).
• Securities, which will be regulated by the SEC.

The bill is still in the early phases but marks a significant development for the virtual currency realm.

What to expect from bitcoin in 2020

For the first time, regulators seem to be looking at cryptos with an open mind. They have approved a regulated BTC futures trading platform, and are now defining the crypto space’s fundamentals. These developments are undoubtedly a big leap toward crypto acceptance among other mainstream asset classes. The upcoming halving event in May 2020 could repeat the crypto bubble in 2017. Could trading volumes jump as they did with the halving in 2012 and 2016?

Investors should definitely keep an eye on bitcoin in 2020. Considering bitcoin’s dynamics, I think Draper’s prediction of BTC reaching $250,000 by 2023 could come true.

First published here: Bitcoin’s Outlook as the Year Draws to a Close