Let’s take a minute to analyze that headline. The head of Technical Strategy at Goldman Sachs – Sheba Jafari – said bitcoin could hit $4,000 and increase its market cap by around 50%. That however, is not the most interesting part about the headline or this story. Many might have missed the nuances of this story completely, and it is understandable. Bitcoin has never even gone above the $3,000 USD mark, so $4,000 draws a lot of attention away from the fact that the head of technical strategy at a company like Goldman Sachs the one who made the prediction. This tells us more than what we think; it is a hint.
This story is hinting at the nature of the money flowing into bitcoin. We might be seeing more money from hedge funds and mainstream investors moving into cryptocurrencies than we think. That has an inherent effect on how bitcoin prices might behave in the future. After all it is very difficult to establish if these new players will behave like the average cryptocurrency enthusiast – the typical ‘hodler’ so to speak. The safest assumption is that these players will bring their old investment outlook together with them into the world of cryptocurrency, behaving radically different than the classical enthusiast.
So, $4,000, Really?
We don’t know how much of Goldman Sachs’ money is invested in bitcoin. We know that the investment banking giant has invested in bitcoin-centric companies, but we do not know what its exposure to bitcoin is. Nevertheless, we do know that its employees are making bitcoin price predictions – bold ones too. We also know that a player like Goldman Sachs and other institutional investors can easily become cryptocurrency market shapers without investing too much. Therefore the $4,000 USD per coin note on that report can well become the center of gravity for mainstream/institutional investors.
Just Entertain this Scenario
With a clear anchor, based on the weight that this piece of analysis might have among mainstream investors, we might start seeing even more institutional money flowing in. More mainstream investors will start considering the risks of investing in an asset that they can buy at a 35% discount according to Goldman Sachs’ predictions. If and when bitcoin starts coming close to that $4,000 USD center of gravity that can attract mainstream investors, they are going to pull out and take their profits.
The corollary to the scenario above has to do with all the other market forces that shape the decision making of these mainstream investors. We must keep in mind that unusually low interest rates created unprecedented liquidity and dwindling returns. But that situation is coming to an end. Mainstream investors know exactly how higher rates will affect the returns on the assets in which they are used to invest. Enough of these investors will rather go into a lower risk asset if higher interest rates make yields more attractive. That coupled with the $4,000 USD expected mark, may create an environment in which these investors decide to pull their money out of bitcoin well below Goldman Sachs’ predicted bitcoin price.
Don’t Lose Sight of the Trees or the Forest!
It is possible to infer then that the price of bitcoin might not reach the $4,000 USD mark that Goldman Sachs forecasts, precisely because they forecasted it in an environment of rising interest rates. This conclusion however is based on heavy assumptions. Bitcoin might reach $5,000 USD by the end of the year, rendering the work of Sheba Jafari and our own analysis, completely irrelevant. That is because there are many more variables that can affect the price of bitcoin this year, such as SegWit implementation and the BIP148 quagmire. Nevertheless, that strengthens the point this analysis piece stems from: don’t focus solely on the price prediction; consider who made the prediction and their own assumptions, before you get swept by bitcoin price euphoria!
I like this breakdown. Thank you. I've heard as high as 10K Bitcoin this year. It would seem these guys could easily add that to the market cap along with a global FOMO frenzy that would accompany it. What do you think of that scenario?
Thanks! We think a $10k by the end of the year scenario, fueled by FOMO could increase volatility significantly. Think about all those mainstream investors with a lot of muscle pulling in and out based on institutions like Goldman Sachs providing $4k or $5k predictions that turn out to be conservative. Add bot trading to the mix and you are in for a ride!
Good post. I think $4-5k is likely to be on the cards by the end of the year , early into 2018
Thanks! We definitely hope it hits 5k. There's probably going to be some turbulence ahead with BIP148 and SegWit...