Is Bitcoin Going to Crash in 2018?
It’s that time of the year when we put our heads together to draft our game plan for next year. For now, however, we are not burdened by our New Year’s resolutions, but rather our new year predictions. The next year is just around the corner and our readers want to know where their investments could be heading in 2018. Cryptocurrencies are on our priority list and we, the analysts at Profit Confidential, are currently debating: “is Bitcoin going to crash in 2018?”
It is certainly a legitimate concern within the investor quarters, especially as fear-mongering of a Bitcoin bubble comes to a head. But since I’m no astrologer, I like to approach this question slightly differently. Let’s first establish this: why does the possibility of a crash exist in the first place?
Why Would Bitcoin Crash?
Bitcoin’s gravity-defying ascension is absolutely mind-boggling. The BTC price didn’t just double or triple; it went up by a staggering 1,500% this year.
But why, exactly, are people going gaga over a cryptic coin that arguably has no intrinsic value and is backed by no government or legal authority?
Human behavior explains it the best. We analysts call it “behavioral finance:” an overlap between human psychology and our financial decisions.
From where I see it, there are two kinds of Bitcoin buyers out there. The first kind are the “devotees,” while the second are the “sheep.”
Part of the Bitcoin mania can be owed to the Bitcoin bugs who are buying this cryptocurrency for no better reason but to stick it to their governments. These investors are the “devotees.”
By giving up their centrally controlled fiat currencies and moving to a decentralized, uncensorable cryptocurrency, they want to bring sovereignty and independence in their financial dealings.
But most part of this mania is hinging on investors’ “herd instinct”–the sheeplike behavior to follow the group. Their instinct is further heightened because of their “fear of missing out,” or as we say it in urban lingo, ”FOMO.”
These “sheep” are buying Bitcoin out of a psychological fear that they might lose their chance to get rich quick with this new investment idea. They are investing just because their neighbor, colleague, or distant relative is investing in it.
It is this second of Bitcoin investor who I fear can bring about a Bitcoin crash. Just as this investor has mindlessly followed the herd through the entry doors, he won’t think twice once the herd heads for the exits.
In the event of a Bitcoin crash (the possibility of which we’ll discuss shortly), the only savior of prices will be the “devotees.” If the devotees–the hardcore Bitcoiners who have not just invested in a cryptocoin but in “Satoshi Nakamoto’s” dream of a financially independent world–hold on to their investments, prices will only drop so much until the “sheep” are out.
What Happens if Bitcoin Crashes?
If we assume that Bitcoin does crash, the outcome could be devastating, but only selectively. It certainly doesn’t pose a systemic risk to the global economy like, say, the financial collapse of Lehman Brothers Holdings Inc. did, although the fearmongers will tell you otherwise.
However, it will certainly cause a significant upheaval in the financial markets where a substantial number of its buyers are active. I’m particularly talking about the U.S., Japan, South Korea, and China.
Investor confidence in cryptocurrencies will significantly falter in the event of a Bitcoin crash, and it may take years to revive it. There’s also a fair chance that it may as well never be revived to the same level again, at least not in our lifetimes.
You may argue that prices recovered from the last Bitcoin crash, which occurred between late 2013 and early 2014. But I’ll remind you that the difference between the number of “sheep” investors between then and now is humongous.
While it took Bitcoin about four years to go from a few cents to $500.00, it took just one year to move the needle from $500.00 to $5,000. Better yet, its ascension to $17,000 took less than three months. Now that’s insane!
Weighing The Possibility of a Bitcoin Crash in 2018
From where I see it, it is investors’ behavioral actions, more than Bitcoin’s own fundamentals, that have largely contributed to the stratospheric price surge.
And this is exactly why fears of a Bitcoin bubble are well-founded.
While I do not write off Bitcoin’s fundamental value as an alternative currency, and I’ve written on it at several occasions, I’m still skeptical of how quickly prices have risen in a very short span of time.
Just look at the Bitcoin price below. Price rallies like this happen in dreams or in bubbles.
Chart Courtesy of TradingView.com
So it’s obvious that if enough investors begin to unwind their positions and the “sheep” follow, a Bitcoin crash in 2018 could be inevitable.
But here’s the catch: do not mistake a Bitcoin crash with a price correction.
Bitcoin prices are extremely volatile and aggressively swing back and forth on a daily basis. In the past five days alone, prices have dropped about 20% and recovered.
So, you can’t really call it a crash. I say that investors of cryptocurrencies should always remain prepared for price drops of up to 50%. That kind of price swing is usual for digital currencies.
Recall that the Bitcoin crash of 2013 saw prices dropping by nearly 80%. Now, a drop of that proportion could count as a crash.
A drop of 60% to 80% is what can really count as a Bitcoin crash. Otherwise, it’s just a price correction.
So am I seeing a price drop of that proportion in 2018? One word: no.
I must remind my readers that I’m an analyst and not an astrologist, nor do I have prophetic powers to predict the future. I can, however, look at the technicals or fundamentals and tell you where I see prices moving.
Fundamentally speaking, Bitcoin is gaining strong ground internationally. Governments around the world are showing interest in legalizing or regularizing this digital form of payments.
Countless businesses around the world are now accepting payments in the form of bitcoins. People are transacting with each other using this decentralized medium of exchange. Bitcoin financial products and services like debit cards and ATMs are functional across the globe.
Above all, we just got the first-ever Bitcoin futures–a government-regulated financial derivative of Bitcoin which recognizes it as a legitimate asset class.
In short, there is real demand for this cryptocurrency out there, which bypasses the “sheep.” So even if some nervous investors begin to jump ship in the event of a downtrend, Bitcoin will likely still remain worthwhile.
I’m not hesitant to say that a Bitcoin bubble may be in the making and Bitcoin prices may be heading for a major correction in 2018. However, I do not foresee a Bitcoin crash in 2018 just yet.