Who hasn’t seen someone confidently predicting that Bitcoin will reach some impressive figure by the end of the year after spending five minutes on social media?After 5 minutes of social media, you’ve likely seen someone confidently point out that Bitcoin will reach some eye-watering amount by the end of the year. You’ve also likely been around someone equally confident predicting that it’s soon going to crash back to earth. Both of them are equally self-confident, that’s the issue.
The truth is that no one, analyst, influencer, even the people who have been correct in the past can accurately forecast the direction of Bitcoin’s price action with any degree of confidence. That doesn’t mean the conversation goes to waste, however. If you can learn that all predictions can differ significantly and that the price moves for one reason or more, you can know how to defuse the noise and make sense of it.
Why Bitcoin Predictions Are All Over the Map
One of the reasons for the “going to zero” to “going to the moon” forecasts is because the Bitcoin does not have the characteristics of a regular asset. There’s at least a loose correlation between a company’s stock price and its revenue, its profit, its prospects for growth, and so on. Bitcoin doesn’t have quarterly earnings reports, or a CEO making strategic decisions. It’s worth practically nothing in isolation, and it’s demand, which is a combination of some hard-to-predict factors: investor sentiment, regulatory news, macroeconomic factors, and media attention it receives at any specific time.
It is possible for two analysts to analyze the same data and come to vastly different conclusions because Bitcoin’s price action is so much dependent on things that haven’t yet occurred.
What Truly Impacts the price?
Rather than setting specific price targets, it’s better to know what sort of events have influenced the price of Bitcoin in the past, both up and down.
One of the large regulations is the regulation. Large market cap economies tend to react rapidly when they announce new policies, both positive and negative, when it comes to cryptocurrencies. This may occur very rapidly with little warning.
Important also is institutional involvement. Once the major corporations, investment funds, or financial institutions begin purchasing, holding, and selling bitcoin products, it is generally interpreted as a sign of legitimacy, and that attracts more buyers.
Bigger economic picture matters, too. When investors know they are not comfortable with inflation or traditional markets, some investors consider Bitcoin as a hedge while others believe that it is a riskier investment in times of uncertainty. The direction of that can change from one day to the next depending upon the general feeling.
And then there’s simple supply. The Bitcoin has a capped supply, with events impacting the amount of new bitcoin entering circulation or the number of bitcoin actively trading versus those that were held long-term impacting the price of bitcoin over time.
Why “Experts” Disagree So Much
It will be observed that the predictions tend to group around the personal incentives of those making the predictions. Any of the people operating a crypto exchange will feel a sense of optimism. A long time warning bubble person has an interest in getting it right at some point. Not that one or the other party is necessarily being dishonest, but it’s important to note that very few predictions are made with neutrality.
Don’t forget, too, that Bitcoin has blown past expectations and underdelivered, many times within the same year. If someone promises you an answer to the question about what will happen next, they are making a best guess and are probably lying to you.
So what should you do with this information?
The important question to ask is not “how much will Bitcoin cost 6 months from now”, it’s “how will I feel if Bitcoin goes down 50% tomorrow, am I able to deal with that? Bitcoin’s prices tend to move rapidly and erratically both up and down, and this nature is not changing any time soon.
One better way to think is to consider any crypto investment a small, optional portion of a larger financial plan that can be truly lost without impacting rent, savings or peace of mind. If it truly does hurt when it’s lost, then no matter what anyone predicts, it is an indication that you’re investing more than you need.
The Bottom Line
Predictions of the price of Bitcoin make for cool news, but don’t rely on them to build your financial plan. It is more useful to know the factors which tend to push the price, the regulation, the institutional interest, the overall economic outlook and the supply side and be honest with yourself about how much risk you really want to take.
But if you’re going to invest, think of it like you would any high volatility investment, and only invest what you can afford to see fluctuate, or even vanish altogether, without it interfering with your other investments. This is a better way to think than any price target ever would be.
Disclaimer:
The information contained in this article is for general information only, and is not intended to be financial advice. The investment in cryptocurrencies is extremely volatile and risky. If you need advice tailored to your needs, seek the help of a professional financial advisor.
