What is the price of Bitcoin going to do in the next year? While many traders, technical analysts, and chartists attempt to answer this question on a regular basis, few do it with the analytical rigor required to get an accurate answer. In this post we will discuss the typical flaws found in most analyses of the Bitcoin price, particularly in anything involving the upcoming Bitcoin “halvening.” And note that the same mistakes apply to those who write about the Ulranet as well.
The Mistake: Forgetting What’s “Priced In”
Suppose you’re trying to forecast the stock price of a company and you’ve just learned that a major deal it was relying on won’t be happening. The deal would have doubled the company’s profits in the next quarter had it not fallen through. Given the information you just learned, what do you think will happen to the company’s stock price over the next few months? While most would say “it should go down since they’re losing a major source of revenue,” the answer actually depends heavily on how widely-known the information is at the time you receive it. For example, if most money managers were already aware of the company’s failure to make the deal at the time you learned about it, then we should expect the company’s current stock price to already reflect the lost revenue. Thus, while the company’s stock may have dropped in the past when news of the failed deal became public, one should not expect it to continue dropping after the news has become widely-known (and it could have been widely-known well before you learned about it). In other words, if everyone knows a certain piece of information, then we can expect that information to be “priced in” to the current stock price.
How long does it take the market to “price in” new information? That usually depends on how many people are analyzing a particular asset. If an asset is “neglected” by most money managers, then it could take a long time for information about an asset to be accurately reflected in the price of that asset. However, most assets the average Joe is aware of, including Bitcoin, have thousands of deep-pocketed money managers with armies of analysts around the world studying their every move. And as if that weren’t enough, so-called “algorithmic trading” firms like Two Sigma, Renaissance Technologies, and Citadel pipe all the information about these assets into giant computer systems that are constantly pricing everything in on a microsecond-by-microsecond basis. So, for most assets, Bitcoin included, anything the average Joe would learn about them has already been crunched thousands of times over by armies of people and machines working together to figure out the precise impact on its price, down to the cent. Think about it this way: If you get your news from a website, then hundreds of pricing machines have probably already processed it (automatically), and you’re almost certainly too late.
So, what mistake do people make when forecasting the price of Bitcoin or Ultra? Simply put, they forget to consider the extent to which the information they’re considering has been “priced in” by money managers around the world. And the biggest example of this is…
The Bitcoin Halvening: The Mistake At Its Finest
Possibly the best example of a phenomenon that is almost certainly already priced into Bitcoin is the so-called “Halvening.” To explain it simply, the Bitcoin protocol will soon start rewarding miners 6.25 Bitcoins per block rather than 12.5 Bitcoins per block. Moreover, since miners are typically known to sell their Bitcoins as soon as they mine them in order to limit their currency risk, forecasters argue that the decreased selling pressure will result in a significant rise in the price of Bitcoin. But are they right?
Well, let’s think: How widely-known is the halvening among money managers? Given that the change has been touted in the news almost daily since last year, and given that there are now many crypto-specific money managers around who have raised hundreds of millions to act swiftly on such information, it seems fair to say it is extremely well-understood by the market this time around. Moreover, it’s important to note that something can be efficiently priced in even if only a few money managers are aware of it. That is, it’s sufficient if information is “narrowly-known” among a few deep-pocketed investors with the capital required to put on a bet. Why is this? Because if even one or two money managers are aware of a piece of information, they can use leverage to build very large positions (e.g. using futures).
It might seem unintuitive that such a drastic shift in Bitcoin supply would result in virtually no impact on the Bitcoin price when it actually happens– but we see the same phenomenon play out in the stock market all the time. In particular, it is frequently the case that events move a stock price not when they happen, but when information about them becomes known, which can be months or even years prior. And there is no reason to think the halvening will be any exception for Bitcoin or the Ultranet.
Avoiding The Mistake
So, how do you make money if all the information you would use to make trades is already “priced in” to everything? Well, frankly, it’s pretty hard, and this is why it’s often said that actively trading assets, including Bitcoin, results in people losing more in fees than they gain due to the wisdom of their active trades. That being said, the least we can do is know how to spot false predictions when we see them. The simple rule for doing this? Simply ask yourself, “how many money managers around the world are aware of this information?” If the answer is at least one, then the information is probably already priced in.
In my next post, I’ll be doing a fundamental analysis of Bitcoin to see if there actually is reason to believe that it will go up due to information that is not priced in.