Euphoria, Disillusionment and the Wisdom of Crowds
This report proposes that the fluctuations in the bitcoin price are not predictable. That the price movements are driven by behaviors and phenomena that collectively, are too complex to model. I propose that those who claim to predict the future price have been vague in their predictions, following none of the ‘Superforecaster’ guidelines outlined by Philip Tetlock. I further propose that they are mostly attaching the movements to macro factors, after the fact.
I would preface this report by saying that I’m not an economist, programmer or mathematician. This report is heavily influenced by Scott Adams, Nassim Taleb, Philip Tetlock, Naval Ravikant and Robert Shiller. The evidence that will convince me that I’m wrong is a public, specific, track record of correct price predictions. To my knowledge there aren’t any like Gurufocus, even in a range of prices.
So how is this an investment report? I do think there is a potential leading indicator of something, but I could also be Fooled By Randomness. Part of the reason for this report is to see if I can be shown to be incorrect, so I can learn from it.
Specifics Matter - The Wisdom of Crowds
In the following article , written February 2014, 50 people involved with Bitcoin in some way were asked what the value of BTC would be in 12 months time. It was about $650 at the time and would be $420 a year later. This is a useful survey because it is so specific. I thank the author for leaving it up. Out of the 50 asked, very few showed a measured analysis. Many prefaced their comments by saying it's very tough to predict, but still predicted at least a doubling in value. One of the key factors may have been confirmation bias, in that their businesses would probably benefit from a big uptick in the price. Only one person predicted the right range. By simply saying they didn't know, two others were more accurate than all of the other bullish predictions.
Alexander Lawn admitted he simply didn’t know
Frederick Thenault didn’t know either.
Alena Vranova of Trezor predicted a range from $50 to $10,000. The only correct range. Even with it she admitted that it was a rough guess.
Alena emerges as a voice of sanity here. A very wide range but nonetheless someone who could identify that a wide price range for bitcoin in 12 months time is barely predictable, if at all.
Tuur Demeester - I find Tuur to be one of the more knowledgeable bitcoin commentators. In his Adamant Research - November 2015 Report he outlined the reasons why the price of bitcoin might go higher. There is no specifics about when this rally will happen, and how much bitcoin will appreciate. It is nonetheless, a compelling summary of the potential for bitcoin and I encourage anyone interested to read it.
Barry Silbert has a strong inside track with many investments in the cryptocurrency space and posts lots of content on Twitter, claiming to have sold all stocks and bonds in December. He predicted a rally of ETC against ETH but like Tuur he hasn’t made any specific price predictions with any exact future time horizon.
Bitcoin undervalued by $200
This report is only partially useful, in that it is specific about values, but is vague about time. It says that BTC is undervalued by $200. It has since passed that value which makes it broadly correct but there was no indication that this would take 3-4 months. It could have been 3-4 weeks or 3-4 years or any other time horizon you can think of. Time and price are essential for specific predictions.
Cancord Genuity - This recent report is useful because they are giving specific price. In November 2025 bitcoin will be worth $5739. They have laid out the reasons they think this might happen and in Figure 19, they see a strong correlation between the bitcoin price and the rise in transaction volume, with departures from it in times of mania. It also splits this transactional volume away from the Perception Value which may be attached to Gold. Again this could be wrong but it is very specific and therefore, crucially, disprovable.
Richelle Ross in 2015, predicted correctly that Bitcoin would pass 650 in 2015. She claims to have predicted On 23rd July 2014 on Quora that the price of bitcoin at the end of the year would rest around $420. Although no link is inluded in the article. I don't see any record of it here either.
Is Euphoria and Disillusionment more identifiable?
Fred Wilson - We are in the trough of disillusionment - Sept 2014.
But Bitcoin is resilient - July 2015.
“It goes up, it gets knocked down, but it hangs in there, and then it goes up again.”
Fred continued to show faith in the technology through blog posts as it declined and then rebounded in value. His prescription was just to buy the same amount each month throughout this period. That would have been a wise strategy that would already have reaped rewards. Alena and Fred are useful because they are measured in their approach. Freds leading indicator about bitcoin is transaction volume on the network and developer adoption.
Here are two potentially useful facts:
There has never been a bitcoin crash (40% or more devaluation in a month) without a spike in the search volume for the term ‘bitcoin bubble’. By spike I mean 10x or more increase in search volume from previous 6 month or more trough.
In the last 5 years, there has always been a crash within 30 days of the price doubling in 15 days or less. So should you sell out when this happens? I don’t think so, but I do think that you should consider reducing your position by a small amount (lets say 10%) in order to bank some of the gains. I think that bitcoin potentially has long term value, but if you have a lot invested in it it's prudent to have some liquid assets for long periods of decline or slow growth. During these periods it may be a good idea to follow Fred Wilson's system as outlined above.
But wait! You say. How can I know when to sell out? The answer is that you can’t. You can only try to listen to people with a good record who have predicted when greed and fear are taking off again.
Here are 3 predictions:
- Taking a lead from Alena Vranova I predict the price of bitcoin will be between $200-$20,000 in 12 months time. I predict this with about 70% certainty. There is a 30% chance it could be lower or higher.
- I also predict that if and when it hits a new high, within 3 months of this, lots of predictions from prominent bitcoiners (10+) will emerge saying that it will go higher soon.
- Finally I predict an increasing number of vague analyses from Bitcoin Analysts with specific or vague price predictions over vague time horizons.
But I could be wrong.
22 December 2016
Disclaimer: Always seek professional advice before making an investment. This report may be wrong.