Bitcoin hit a record high of 19,511.00 on December 18, 2017 giving holders of the cryptocurrency a very nice Christmas present. It has subsequently declined more than 50.00%. It appears the bubble has burst. Bitcoin rivals Ethereum and Ripple also declined sharply. The prospect of tougher regulations on digital currency has sapped the optimism from the market. India's Finance Minister said last week, "The government does not recognize cryptocurrency as legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system." Meanwhile, in China, the People's Bank of China has indicated they intend to block all platforms related to cryptocurrency trading and the issuance of initial coin offerings (ICOs). Additionally, major banks and credit card companies have begun to block their customers from buying cryptocurrency with their credit cards (a very risky proposition to begin with).
The fair market value of bitcoin is rather difficult to ascertain. It is a digital unit of value backed by faith in its utility as a medium of exchange. As such, it is worth whatever the market is willing to bear. There are no discounted cash flow equations that can be computed. Bitcoin does not pay any interest or dividends. How can one be sure what bitcoin is really worth? My view is that one cannot really be sure of what bitcoin is actually worth. However, one can look at past bubbles in the bitcoin market and apply these scenarios to the current bust.
For this analysis, I will define a bust as a 50.00% or more decline from a recent peak price. Bitcoin has had three instances in which it declined more than 50.00% since 2011. The first of these busts occurred between June 8, 2011 and November 18, 2011 with bitcoin declining -93.07% from peak to trough. The second bust occurred between April 9, 2013 and July 5, 2013 with a decline of -70.15% from peak to trough. The third occurred between November 29, 2013 and January 14, 2015 with a decline of -83.90% from peak to trough.
The median peak to trough was -83.90% and the average was -82.37%. The range of peak to troughs was -93.07% to -70.15%. We can use these statistics to apply a peak to trough estimate of bitcoin from the last bubble peak on December 18, 2018 end-of-day close of 18,674.48 (intraday high was 19,511.00).
If the past is any predictor of the future, the end of the current bust to be somewhere in the range of $1,293.33 to $5,574.84 with a central estimate approximately $3,006.76 to $3,291.64 range based on the median and average. The drawback to this estimate is a small sample size (n=3) and assuming the past is any representation of the future. Based on the data above, we can estimate a worst case scenario trough price of $1,293.33. The median peak to trough would indicate a trough price of $3,006.76. The average peak to trough would indicate a trough price of $3,291.64. Finally, the best case scenario trough price estimate would be $5,574.84.
My long-term view for bitcoin is positive. I believe bitcoin will consolidate closer to fair market value and at some point continue on its long-term uptrend. I do not believe the concept of a cryptocurrency is a "Ponzi scheme" though some cryptocurrencies have been found to be exactly that. However, those "coins" are typically very obscure (like penny stocks) and nothing close to the size and actual utility of the bitcoin market. I believe cryptocurrencies are like the internet in the 1990s. Many of them are going to fail. But out of that chaos will arise the Amazon's, Google's, and Facebook's of cryptocurrencies. Just like the internet was here to stay in the 1990s despite the chaos of the tech bubble, I believe cryptocurrencies are also here to stay.