Bitcoins' Problem Is Loss Of Interest

30 January 2018 | Dwaine van Vuuren

The 50% decline from heady heights of $19,000 per Bitcoin was accompanied by a commensurate decline is investor interest.

There is an uncanny close correlation between Google searches for the term "Bitcoin" and Bitcoins’ price. On a weekly closing price basis, Bitcoin has fallen 40% which is exactly the amount that Google searches have collapsed for the cryptocurrency:


Here is a more mathematical example of the relationship between Google searches and the price of Bitcoin, showing a correlation of better than 83% between the two in the 52 weeks since January 2017:


From the first chart, we see that Google searches appear to have a leading relationship to price rises but more than likely, priced rises lead to more interest which in turn fuels more price rises.

A similar exercise for "altcoins" and "cryptocurrency" shows that interest has waned far less, leading to an assumption that Bitcoin is suffering at the hands of higher interest in other cryptocurrencies.

In a prior article we discussed a framework for measuring the significance of various cryptocurrencies in relation to Bitcoin. The table below, taken from this article, showed how a lot of crypto was becoming increasingly significant to investors which obviously will detract from the interest in Bitcoin. 


When BTCUSD approached $19,000 (R310,000) we warned most SA Crypto Club participants that a top was in sight and that crazy profits ought to be taken off the table with aggressive selling into the rallies to reduce risk exposure. One of our observations was that conditions from a regulatory perspective appeared to be turning increasingly hostile despite the rapid price increases. Another was that local LUNO prices converted to Dollars were exceeding international prices by up to 35%, indicating elevated levels of SA speculation, a good warning of Bitcoin tops as demonstrated in the chart below:

(Click image to enlarge)image4

Additionally, we noted that conditions on the local stock market were turning decidedly bullish on a technical and macro-economic basis and the theory was to bank these crazy Bitcoin profits and rotate them into traditional less risky investing assets. On this particular occasion this appears to have been the right approach.

Since Bitcoin is now more than 40% down from December 2017 highs and local prices are only trading at a 5% premium to international prices (speculation levels are low, normally a buy signal), current conditions likely present a far better entry proposition (lower risk of pullback) than at $19,000 or R300,000 per coin. We must however point out that the climb back to $19,000 is likely to be an arduous one, especially given the tail-off of user interest and heightened crypto regulations and increasing interest in alt-coins.

We are often asked what "fair value" is for Bitcoin. Whilst this is a very difficult question to answer for any nascent technology or asset that is changing the rules and dynamics of the old order, we can make some guesses. Firstly, if one acknowledges that Bitcoin has less than 5% penetration in most first-world markets and accepts that its growth will roughly follow a multi-order polynomial or exponential adoption curve, then the chart below shows that Bitcoin is more or less where it ought to be right now, perhaps conservatively it ought to be at the $8,500 mark.


Secondly, we have examined many attempts to determine fair value for Bitcoin quantitatively, and the best analysis we have seen is based on a cost-of-production method that tries to seek out that price at which a sophisticated operator would rather buy Bitcoins outright than go through the effort of mining them. One comprehensive analysis we liked determined that given all the opportunity costs, costs of mining gear, electricity, security, premises and current mining difficulty, that at $9,500 per Bitcoin it would be better to buy coins outright.

Thus, we can make a rough guess that Bitcoin prices in the $8,500 - $9,500 range represent close to "fair prices" for Bitcoin and acquisition at these levels should offer least risk and potentially the greatest reward to the investor or trader.

Cryptocurrency investing or trading remains a highly volatile business with the evolving regulatory landscape most likely the biggest risk facing the space. A year in crypto is actually the equivalent of 4 years on the stock market, given that crypto trades 24x7x365. In the space of the last year there were 4 large 25-45% corrections so if you intend to "invest" in this space you need to be prepared for these types of corrections on a regular basis in any 1 year rolling window. In fact, these pullbacks are healthy and keeps the bubble in check. Provided the graph keeps posting higher highs and higher lows, the bull remains intact - but do not be deluded that we will see Bitcoin gains similar to 2017, displayed below, again.


Given potential asymmetrical outsized gain/losses in the cryptocurrency space, your best approach to participate with a prudent level of risk is to limit your exposure to 1-5% of investable assets and to further diversify by limiting exposure to Bitcoin to no more than 50% of your crypto allocation, perhaps using the significance table we provided at the top of the article to identify other crypto to complement your Bitcoin. The old crypto motto applies, namely only dabble with what you are prepared to lose. To those sitting on outsized gains of a life-changing nature, it would be foolish to not take profits off the table, even if it means paying taxes.


Dwaine van Vuuren
Retail-side Research
RecessionAlert, Sharenet Analytics

Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow (US based) and PowerStocks Research (now Sharenet Analytics) into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.

The information contained in this article is for informational purposes only and must not be regarded as a prospectus for any security, financial product or transaction. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial issue. Investors should consider this research/article as only a single factor in making their investment decision. We recommend you consult a financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs. The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Sharenet.

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