Why Bitcoin’s Price may Rise Forever – or at
Least, a Really Long Time
By Joe Duarte on December 18, 2017
Editorial notice: I will be off next weekend but
will deliver my weekly Portfolio Update to paying subscribers as usual.
There are two major themes in this market and they are converging.
One is the Trump agenda and the other is the evolving Bitcoin situation.
Although they are not exactly related, they share two characteristics
– their unwillingness to die and their seemingly unending ability to
disrupt the status quo.
We are clearly in unchartered waters. On the one hand, Trump’s tax
cut plan, regardless of how it stacks up for anyone particular person
has become Wall Street’s rallying cry. When the tax cut has run into
turbulence of late stocks have fallen. And when hurdles are cleared,
stocks have rallied. On the other hand, Bitcoin is the proverbial,
black box, “buy the dip” phenomenon with prices rising and falling
thousands of dollars and multiple percentage points at any given time.
Never mind the fact that to the average person Bitcoin is a virtual
unknown beyond the fact that its price fluctuates astronomically on
a daily basis. More important is the fact that Bitcoin isn’t really
money or even coins. It is nothing more than computer code which is
gathering a significant following. Yet, regardless of its intrinsic
makeup, its novelty, and its uniqueness, it’s gaining ground as a tangible
currency as businesses are starting to accept it as a form of payment.
Of course, there is always a kicker. If we are to believe those in
the know, Bitcoin is designed to rise in value forever because of the
way each new coin is mined. I want to flesh that last point out a bit
and I want to confess that my understanding of this particular feature
of Bitcoin comes in third hand. It’s like this, a reliable source was
shooting the breeze with an algo he knows – a guy that mines Bitcoins
and trades via algorithms - and he learned the following during the
conversation: the reason the dips in the price of Bitcoin are always
a buying opportunity is that the Bitcoin code has a built in “clause,”
or code line that keeps the price rising, no matter what.
This, as I understand it, is because the major factor that can stop the
cryptocurrency from rising is the computing capacity available to mine
it at any one time. From a practical standpoint, this means that Bitcoin
is in the middle of a potentially permanent supply squeeze because as
each new coin is mined the code – by design in order to make each coin
unique - gets longer. Therefore the complexity, due to available computing
power and the time required to mine one coin increases all the time.
Think of this as a lottery. Your Bitcoin mining computer has to be in
touch with all the other mining computers and has to figure out how to
make your Bitcoin’s code unique at the same time that all the other mining
computers in the world are doing the same thing. Meanwhile all the speculators
are buying into the limited supply of Bitcoins at any one moment. As
a result, prices are more likely to keep climbing for longer than anyone
If that is correct, this is a potentially never ending cycle, because
as long as the code is required to become more complex with each new
coin, there can’t ever be enough computing power to keep up with rising
demand for new coins. Indeed, if I am correct, in the language of mathematics
the relationship between the supply and demand for Bitcoin is asymptotic,
meaning that the two lines can approach each other but never actually
Thus until something is altered in this equation the price may trend
higher indefinitely, even if there are sizeable corrections along the
way. If that is true, then Bitcoin is more than just a fad. Furthermore,
it’s a total unknown - something that has never been seen and thus
it is poorly understood, perhaps even by those who are most familiar
with it. What that means is that the world’s central banks are already
behind the eight ball and that if and when they respond to Bitcoin’s
attack on their ability to rule the money roost, life will be very
interesting for us mere mortals. So unless central banks regulate Bitcoin
or change the way it is coded, there will always be the theoretical
and so far real potential for a permanent supply squeeze in the Bitcoin
market and a general up trend in prices.
NYAD Says Higher Prices Loom for Stocks
Bitcoin may be difficult to decipher, but the New York Advance Decline
line (NYAD) is not. Indeed, this has been the most useful indicator
since the election of Donald Trump as president. And what it’s saying
as of December 15, 2017 is that the bull market still has upside potential.
The NYAD chart has three important points. First, the NYAD broke
out to a new high last Friday. Second, the RSI indicator is still below
the oversold level. And third, the ROC indicator, which measures momentum,
has found support at the zero line. Altogether, this data trio remains
bullish for stocks.
The S & P 500 (SPX) also made a new high last week although there
is still a lag within the Accumulation Distribution (ADI) and On Balance
Volume (OBV) indicators. Ideally you want these indicators to confirm
the highs in the index. For now, it’s not a full divergence, but it
is something to watch carefully, especially if prices start to show
signs of weakness.
The story is more encouraging for the Nasdaq 100 (NDX) where both
OBV and ADI are confirming the new high in the index. This suggests
that money is moving back into the big cap technology stocks after
the recent dip in prices.
End of Year Promises to be Interesting
If the GOP passes the Trump tax cut, and there is some type of clearing
in the political dust in Washington stocks may continue to move higher.
That is, of course, unless traders decide to see on the news, which is
what used to happen in markets in the past, but is not a guarantee with
robots ruling the roost. That said, the real unknown for the entire financial
universe is Bitcoin, and what central bankers may decide to do about
it, if at all. Your guess, on that one, is as good as any.
Merry Christmas to all, I will return in this space on December 30,
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