HONG KONG, HONG KONG - AUGUST 21: A visual representation of the digital Cryptocurrency, Bitcoin is seen on August 21 2018 in Hong Kong, Hong Kong. (Photo by Yu Chun Christopher Wong/S3studio/Getty Images)
July was a solid month for cryptocurrencies overall, with the price of Bitcoin reversing the steady declines seen over the previous two months to hover around $8,200 around the end of the month. This marked a strong recovery from the low of $5,755 seen in late June, but was still well below the all-time high of almost $20,000 last December, and also a good 18% lower than the ~$10,000 figure seen less than three months ago.
Notably, there was a recovery in the level of activity on the Bitcoin network over the month of July, with the average number of unique addresses and the average transaction volume per unique user improving from the lows seen in June. However, with both of these key metrics sliding lower over the first two weeks of August, the price of Bitcoin has slumped to below $6,500. Given the current weakness in Bitcoin trading activity, we have reduced our forecast for number of unique users as well as transaction volumes in our interactive Bitcoin Price Estimator. We now expect the Bitcoin price to settle around $9,500 by the end of the year for our base case scenario – down from our earlier estimate of $10,500. The graphic below captures our base case forecast for the monthly average price of Bitcoin this year based on our estimates for transaction volume and number of Bitcoin users, and also shows a possible price range for the cryptocurrency taking into account a relatively bullish as well as bearish outlook for the rest of the year.
Understanding What Drove The Price Fluctuations Over Recent Months
The global cryptocurrency industry has seen a flurry of new developments since December. Many of these developments had a negative impact on the growth prospects of cryptocurrencies, such as restrictions by banks on the use of credit cards to buy cryptocurrencies, and calls by financial regulators across the world for caution while investing in digital currencies (with some countries even banning their use). This sent cryptocurrencies sliding in value from the all-time highs seen in mid-December 2017, as demonstrated by the slump in Bitcoin’s price from almost $20,000 then to below $6,000 in early February.
However, Bitcoin prices saw a sharp recovery over April and early May, primarily because the traditional financial industry began warming up to cryptocurrencies. While Goldman Sachs became the first investment bank to start a cryptocurrency trading desk, IntercontinentalExchange (which owns the NYSE) reported its ongoing work on a new trading platform that will allow institutional investors to buy and hold cryptocurrencies. As this points to increased adoption of cryptocurrencies in the near term, the good news propelled Bitcoin prices higher.
But Bitcoin prices slumped in late May when Mt. Gox dumped more than 8,200 Bitcoins on existing exchanges, and further in June when two South Korean cryptocurrency exchanges were hacked. In addition to having a negative impact on Bitcoin pricing, these events also dragged down Bitcoin trading activity, as evidenced by a notable reduction in the number of users on the Bitcoin network. The trend reversed in July, though, with renewed institutional interest in cryptocurrencies driving activity levels. This was driven by growing optimism around the SEC potentially approving a Bitcoin ETF.
The SEC’s approval would make Bitcoin a more accessible investment option for investors globally, and definitely presents a sizable upside for the cryptocurrency. However, little has been able to quell investor concerns about the security of cryptocurrency exchanges over recent months – something that we believe will continue to weigh on activity levels in the near future.
What Does This Mean For Bitcoin’s Price?
Like the price for anything, Bitcoin’s fundamental price depends primarily on demand and supply. Demand for Bitcoin is primarily driven by two factors: the number of active users, and how much they transact. On the supply side, the number of available Bitcoins is capped, and about 80% of the capped number is already mined. As such, it is sensible to focus on the demand, both in terms of users and transaction volumes. In our interactive Bitcoin Price Estimator, we forecast changes in the number of unique users as well as transaction volumes for each month over the rest of 2018 to arrive at our estimate for Bitcoin’s fundamental value.
As we detailed above, given the headwinds faced by both of these metrics over the month of August, we expect them to grow at a modest pace over coming months. As a result, we believe that the Bitcoin will very likely remain below $10,000 for the rest of the year.
This video shows how to leverage our bitcoin pricing dashboard. While the dashboard looks fairly basic, in back-testing – a method to see how well it could have predicted prices in the past – it was almost 94% accurate.
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