Seeing an asset go from almost $20,000 ten months ago to $6,000 today is scary. In the world of financial markets, fear is a sentiment that can cost you everything you have. In order to stop being frightened by what is happening today we must understand why it is happening. What scares us the most is what we don’t understand.
The first cryptocurrency, known as Bitcoin, was created in 2009 by Satoshi Nakamoto in response to the fall of Lehman Brothers’ and the ensuing global financial crisis. Nakamoto’s goal was to create a decentralized and secured currency that could be used by anyone, uncorrelated to political scandal or economic crisis. The idea was that Bitcoin’s price would be driven exclusively by the supply and demand of its users.
Now, on the 10th anniversary of Lehman’s fall, the Bitcoin community has evolved tremendously. Bitcoin is now a symbol of a brave “new economy,” even if it has had its share of crises and teething problems.
Due to the increasing interest of the financial sector in crypto, the internet is now full of articles and analysis from top Wall Street traders. They explain, with charts and technical financial terms, why the crypto market is getting hit at the moment. Typically, these explanations use traditional capital markets mechanism to demonstrate the crypto moves.
Perhaps, these methods of analysis are not appropriate? After all, cryptocurrencies were created to disrupt the banking sector. In order to really understand crypto you need to put aside what you know about the stock market — even if it is the closest comparison available to us — and stay focus on the Bitcoin model.
As Albert Einstein said: “We cannot solve problems with the same thinking we used when we created them”
The Bitcoin ideology
First, we need to make an important distinction: Bitcoin isn’t a share, nor a derivative of any underlying. For example, if there was a company called “Bitcoin Ltd.” behind the Bitcoin token and that company was making $1 billion in annual revenues, as a Bitcoin holder you would be entitled to exactly… Zero dollars. Why? Because Bitcoin is not an equity. Bitcoin isn’t a currency, as we know it, either. The digital money is decentralized and thus is decoupled from any central bank decision, political scandal, war or major economical event. So what is Bitcoin ?
Bitcoin is a concept: it’s the concept of being able to pay electronically for any good, service or to securely transfer money to anyone, almost instantly, without any physical third party charging you fees or restricting your movements. You can’t compare Bitcoin to anything you know. It differs from everything because, essentially, it is a machine executing an ideology without any human being or underlying situation altering its program. Bitcoin is only dependent on its regular users.
What are these “regular users” or “Bitcoin believers?” These are the people who endorse the Bitcoin concept: any person who buys Bitcoins for the purpose of using it for its intended purpose. This community of people is the sole, secret key to defining the fair price of Bitcoin.
“Adoption” is the key
A famous adage goes: “You can’t really know where you are going until you know where you have been.” The past often holds the answers of the future so let us look at some important stages of Bitcoin’s history.
Stage 1: The Birth. In 2009 Satoshi Nakamoto mined the very first Bitcoins and sent them to a community of developers. An offer for Bitcoins was officially placed publicly. As more people heard about this concept of payment they adopted it by buying tokens in order to use them for payment or money transfer. The price rose to $0.30 in beginning of 2011 purely due to supply and demand. The Bitcoin community of regular users was increasing faster that the growing offer placed into the market by miners.
Stage 2: The Black Market. Businesses and e-businesses started to adopt the concept and helped the growth of the community, while, in the meantime, making the name “Bitcoin” more popular. Some will say (like I did a few years ago) that Bitcoin was the currency of terrorism, drugs and money laundering but I was missing the point then: Bitcoin has no rule, no ethics, no regulation. Bitcoin was only a concept, adopted, day by day, by a larger community of regular users which made the price of the token rise.
Stage 3: Wall Street. A few years later, Bitcoin became very popular but purely as an investment, an asset, a speculative instrument — the concept part had been lost. This precipitated the spectacular rise to $19,511 in 2017. Thanks to Wall Street players, the press around Bitcoin and the dreams associated with it (to become millionaire and to drive a “lambo” just by “hodling” it), millions of retail buyers rushed in, giving the semblance of a mass adoption. But this was an illusion — they were buying the hype, rather than the concept.
Stage 4: Today. People have forgotten that Bitcoin is a concept at its core and what the concept is. This year’s crash has nothing to do with regulation, Goldman Sachs’s crypto ambitions, ETFs creation, etc. Bitcoin’s core concept has not changed. Bitcoin’s price is only supposed to reflect the number of people who have adopted the concept.
Holding Bitcoins in a wallet “for better or worse until bankruptcy separates us” isn’t an adoption of the Bitcoin. Such “investors” don’t understand what they are holding and may be panic-sell their investments on the next big move, sending the price lower and causing others to sell in panic as well. This is what we have been seeing in recent times. So what happens next?
Counting the believers
Returning to the original concept — the price is only supposed to reflect the number of people who have adopted the concept — we can see that the price of Bitcoin is an indicator of the number of believers/regular users of the concept.
Before we entered Stage 3, Bitcoin was trading around $1,500. Back then, before the “buzz”, this value represented the number of people who adopted the concept (and used Bitcoin to pay electronically any good, service or to securely transfer money to anyone).
Even though it was superficial and ephemeral, Stage 3 had one very positive effect: it gave Bitcoin huge visibility and tremendously increased its believers community.
The real question is: How many more believers do we have since January 2017? Two times More? Three times more? Ten times more?
Surely, there are no fewer believers and users of the Bitcoin concept than there were when the price was showing $1,500-$2,000? That means we could see those prices again. The logical takeaway from this analysis: BUY! BUY! BUY!
Even if we didn’t give an exact number for the fair price of Bitcoin (stay tuned for our next piece) the purpose of this article is to break the secret of fair price: regular Bitcoin users.
“Investors,” “Traders” and others neglecting the core concept of the currency may be able to move the price up or down momentarily but a floor price will be implicitly defined by the number of users which regularly need Bitcoin. This community of people is designing the demand: they are the fair price.
— Jonathon Solomon, Enigma Team, Tel Aviv