Bitcoin Valuation Basis & Technical Analysis - 9/15/2017

There is no way to fundamentally say Bitcoin is worth X today. Cryptocurrency fundamental analysis is based upon trends and behaviors of markets. It is not based upon some intrinsic valuation that exists in a given day. When a fundamentally negative event like China hits the market, there is no price at which Bitcoin is cheap relative to its intrinsic value since it has none.

However, if we wanted to arrive at something like an intrinsic value, we would look at the long-term trend of cryptocurrency and where it is headed. Then also, we would want to realize how Bitcoin fits into the long-term trend.

Valuation Basis for Bitcoin

The valuation basis for Bitcoin exists not because it is great money. It is terrible money that costs fees between $5 and $60 to issue a transaction to the blockchain.

What Bitcoin became though, was the trading reserve currency of all cryptocurrency. At some point, anyone in crypto is buying and selling Bitcoin because it is the base pair for most cryptocurrency trades, especially for the smaller markets where this is forced on us. Even for the larger pairs like ETH and Ripple, Bitcoin is still prominently used.

If we imagine the future of cryptocurrency then, where we have larger systems that are actually used by the internet or major institutions, and Bitcoin is the currency such coins are traded against, this is the valuation model for Bitcoin.

If EOS becomes 50 bil to 100 bil in the future due to actual system use, then Bitcoin as the reserve currency against EOS is worth something significant, perhaps at least 200 bil.

Valuation Logic

• If BTC is a major reserve currency for trading, then a percentage of all trading must occur in Bitcoin in the future
• If people trade Bitcoin in the future, at any given time there are people holding and owning Bitcoin to facilitate trading and transactions
• If Cryptocurrency as a whole grows in the future, and BTC is a reserve currency, then more people will be holding Bitcoin in the future at any given time
• If the trend is that more people hold Bitcoin in the future than today, this favors an increased price since supply is limited but demand is increasing

It is clear then there is no attributable value to Bitcoin in terms of a baseline value like a company might have; however, there is an overall trend which creates a future increasing demand on Bitcoin, while supply will not increase at that same rate but is capped long-term.

Basis for Technical Analysis

Since on a short-term time frame it is impossible to assign any intrinsic value to Bitcoin or most all of cryptocurrency, where investors would be strongly incentivized to hold a price level, we must then rely upon technical analysis as the only window into near-term behaviors. It is not the case that technical analysis determines market outcomes. Fundamental factors of actual users of bitcoin, buying and selling always determine price not technical analysis; however, we do not have that type of information available for analysis to know or predict future behaviors of market participants. Since we do not have the raw data of transactions and holders with their predicted intent, Technical Analysis gives us a decent basis for analyzing behaviors which should be better than statistically neutral.

Many people scoff at TA because they cite some flawed scientific study. Whenever TA is put into a box which is consistent enough for study, it strips TA of most of its power because all predictions with TA are subject to change with each new candlestick and likewise often the basis of such studies are put upon false assumptions disallowing for the complex alternative positions someone might hold. The advantage of TA then requires flexibility in its application, with risk / reward control. Such it is the case we can make money with TA trading, but it is also the case this may not outperform "buy and hold". "Buy and hold" is also, though, a flawed mentality because in declining markets it could never recover funds invested. "Buy and homework" is the legitimate fundamental investor position.

What visibility does Technical Analysis Provide?

From how I have learned it, TA is best described as a dance with optional outcomes. Imagine an adaptive dance where the person in the lead has several options of steps they can take, all leading to different results in the end price movement, but all generally conforming within a system of rules of how those steps proceed.

None of these outcomes must occur, as the person in the lead could choose to violate all the rules. Yet, if we were to analyze decent technical analysis done by an informed market trader, quite likely statistics would favor their analysis more than random guesses. The truth then is, it is not random, but neither is it perfectly predictable. It falls somewhere between 50/50 guess and very likely to occur.

With all this explained, this is the basis of the following technical analysis:

Analysis for Bitcoin - 9/15/2017

The following principals are applicable to what I am seeing in the market presently.

TA general principal #1

- Oversold equals fast rally in opposite direction, especially if there is no fundamental limitation on the upper value of a given asset

Target area for oversold rally, 3,600 to 4,000.

TA general principal #2

- Declines in the order we have seen recently, due to a fundamental factor such as uncertainty in the Chinese regulatory environment, often require at the very least a retest of the decline lows. V-shaped recoveries generally require fundamental factors driving that fast recovery where market participants are bullish in their viewpoint to buy, to reach new highs. A stalled market with the same fundamentally negative event still over-hanging it, is unlikely to have a fast V-shaped recovery.

Target area for 2nd Bottom, 3,200 to 2,600 for standard 2nd bottom (Light Blue).
Disaster situation due to more fundamental negative events hitting the market, 2,600 to 1,800 (Dark Blue). I think the disaster 2nd bottom is less likely but it is worth mentioning if we have another series of negative events.

Optional Recovery due to Alt-Coin

If it is disclosed that ETH or BTC will be forking an alt-coin project that receives any hype at all, either coin, preferably Bitcoin could then create an alternative positive market outcome.

I would give a BTC alt-coin rally some where between 4,500 and 4,200. This all said, I am not sure how likely it is.

Optional Farther Decline before Bounce

Even with an oversold market, the possibility may exist for further declines before the subsequent oversold rally occurs. Without an intrinsic value to BTC, it is impossible to say where such a bottom would exist, only that the following oversold rally would be substantial if BTC continued to decline below the 3,000 level it is presently at.

My personal viewpoint

I favor the first chart with the fast rally of 3,600 to 4k, and then also the possible 2nd dip.