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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 expects.

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 intersect.

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, 2017.

 

















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