Bitcoin: Why 2020 Could Be A Blockbuster Year – Seeking Alpha

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Bitcoin (BTC-USD) as well as the cryptocurrency complex, in general, have gotten off to a remarkably strong start in 2020. In fact, since my "Bitcoin Overview: Critical Support Level" article was published on December 18th, Bitcoin has surged by roughly 34%.

It's Not Just Bitcoin

In the preceding article, I mentioned that some prominent altcoins got drastically oversold in the relentless wave of selling that occurred in Q4 2019. I also wrote that it was very likely a good spot to start accumulating some prominent altcoins, and that they would very likely outperform Bitcoin percentage-wise in the upcoming rally.

They Did Not Disappoint

Since then:

Some altcoin gains have been astronomical, considering the very short time frame (less than 1 month). Nevertheless, I believe that Bitcoin and select altcoins have a lot of upside potential remaining long term, and the recent rebound is just the start of a prolonged move much higher.

Source: Binance.com

We see that Bitcoin's technical image appears extremely constructive since the bottom was reached around $6,500 on December 18th. There was a sharp rebound from a crucial technical support level. This was followed by a healthy consolidation phase in which Bitcoin traded between around $7K and $7.6K for a couple of weeks. Then, Bitcoin took off, surging by roughly 30% since the lows of early this year.

If we take a longer-term view, we see that Bitcoin formed a reverse head and shoulders pattern from November to early January and is now filling out a cup-type pattern that will likely conclude at roughly $10K. From there, we can probably expect a slight pullback followed by a consolidation (handle of the cup) to materialize. After that, Bitcoin is likely to recapture its uptrend and retest prior highs of 2019 at around $14K.

Bitcoin's price action is crucial to the entire cryptocurrency complex. Bitcoin is the clear leader in the space with a market cap of roughly $160 billion, or nearly 66% of the entire cryptocurrency complex, which includes over 5,000 different digital assets.

Now, many of these digital assets could remain relatively worthless, as there are too many projects in this space, in my view. Many digital asset projects joined the party too late, and most will likely have very little, if any, impact on the global financial order.

However, this is not true for all altcoins. Thus, I focus on the market-leading coins that have been around for a while, have stable and trustworthy networks, command formidable market caps, and have potential for gaining substantial market share in their segments going forward.

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I specifically like coins that can be used as efficient transactional vehicles. Bitcoin and, to some extent, Bitcoin Gold are more of store of value instruments as opposed to widely used mediums of exchange tokens. That is why we have coins like Litecoin, Dash, Zcash, Bitcoin Cash (BCH-USD), Monero and others.

These are excellent coins that market participants could utilize to make everyday transactions. This is where a lot of the potential lies going forward, in my view. In fact, we see some of the biggest gains recently coming from coins like Dash, Zcash, Bitcoin Cash and others.

Source: CoinMarketCap.com

Remarkably, Bitcoin Gold is up by around 90% just today. Bitcoin Gold is a forked product of Bitcoin, and shares many of the same properties that Bitcoin has. It is essentially designed to be a digital store of value mechanism, much like Bitcoin. However, whereas Bitcoin is trading at nearly $9K today, Bitcoin Gold is only around $15 and hit a low of under $5 in December of 2019.

Therefore, Bitcoin Gold could have a lot of upside potential in the future as it is essentially a derivative of Bitcoin but is extremely cheap relative to BTC. Bitcoin's market cap is around $160 billion, while BTG's is only around $268 million and was as low as about $90 million less than a month ago.

So, why the recent rally? Part of the reason is based on technical elements, but part of the recent rally is fundamentally-driven. On Jan. 14th, the CME Group launched a new derivative product on top of its Bitcoin futures, Bitcoin futures options.

Futures options are a convenient and cost-efficient way to play the Bitcoin market as market participants don't need to put up as much capital as they would need to trade Bitcoin futures contracts. Furthermore, market participants can use traditional trading platforms, independent from crypto exchanges, digital wallets, etc.

Additionally, and perhaps, more importantly, this is another key step towards bringing Bitcoin and institutions together. Anything that can be traded on major regulated exchanges having to do with Bitcoin is extremely positive, as it gives institutional investors an opportunity to participate in the Bitcoin market.

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Moreover, these are steps that will likely lead to the introduction of Bitcoin ETFs down the line. Some analysts now say that there is about a 60% chance that a Bitcoin ETF will get approved in 2020. Personally, I believe it is inevitable that multiple Bitcoin ETFs are introduced eventually, within the next 1-3 years.

The introduction of Bitcoin ETFs (likely physically backed) should create enormous demand for Bitcoin, as Bitcoins will be needed to launch the physically-backed ETFs. This should simultaneously create a wave of demand from institutional buyers, as well as from individual/retail investors as they rush to accumulate Bitcoin through both traditional crypto exchanges as well as in ETF form.

With surging demand for Bitcoin, many altcoins should also perform extremely well. Even if we put aside their functional properties for now and look at prominent altcoins simply as investment vehicles, we can infer that prices will likely go much higher long term.

As Bitcoin gets adopted into the mainstream as a viable investment instrument, demand for Bitcoin will very likely reflect extremely positively on demand for many altcoins as well. Furthermore, it is also possible that institutional investment products get structure around altcoins in the future.

As an example, a basket-type ETF that includes transactional coins such as Bitcoin Cash, Dash, Zcash, and several other highly functional cryptocurrencies may make for a very attractive investment product down the line.

Other ETFs can be structured around niche coins as well. Essentially, the sky is the limit if the digital asset world can get accepted into the mainstream investment community. It all starts with Bitcoin, and despite occasional setbacks, it appears that Bitcoin's adoption is progressing quite well.

The beauty of digital assets is that most of the true, decentralized cryptocurrencies like Bitcoin, most of the others I mentioned earlier, and many more are mineable coins that have a set limit that can ever exist. For Bitcoin, its forked derivatives, and certain other coins, the max supply is only 21 million. For some other true coins, it is slightly fewer. For some, it is more.

Nevertheless, the supply is capped. This means that, when demand increases exponentially, there is no way to substantially increase supply. This phenomenon will very likely result in much higher prices across the board for widely held, used, and recognized cryptocurrencies.

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Another factor that I want to point out is that Bitcoin's network keeps growing, with roughly 45 million blockchain wallets now. Bitcoin and other digital assets benefit greatly from the network effect. The more people that are on a network (i.e. Bitcoin's blockchain), the more valuable the network and its underlying asset becomes.

Blockchain Wallets

Source: BlockChain.com

You can think about in terms of Facebook (NASDAQ:FB). The company would not be very valuable or very powerful if it had 100, 1,000, or even a million users. However, with a couple of billion people using its network, the company is one of the most valuable and powerful enterprises in the world.

A similar phenomenon concerns Bitcoin and other prominent coins. The more people join a network to trade, transact in, invest, or do whatever they want with their digital assets, the more valuable the digital asset, along with its blockchain network, becomes. This is essentially due to increased popularity, coupled with demand, which drives price.

One thing that separates Bitcoin and other tokens from other assets is their set limit. Facebook, or any company for that matter, can issue more shares, commodities can be mined or derived from the earth by other methods, some can be produced, grown, etc. Dollars and any other fiat currency can be printed at will. So, just about any other asset class can be expanded indefinitely, but not Bitcoin.

As I've mentioned before, Bitcoin and many other coins have set limits. Once the 21 million are mined, that is it. There is no more ever. Also, Bitcoin becomes more difficult to mine the closer it gets to its limit. This phenomenon concerns many other altcoins as well.

With only about 45 million blockchain wallets in existence, it is likely that we are still in the very early stages of the digital asset development cycle. After all, there are roughly 4.5 billion people around the world with internet access. I will also assume that most of them probably engage in commerce (transact), and/or speculate or invest. Therefore, the potential market for Bitcoin and altcoins is huge, roughly 4.5 billion people.

Even if we presume that each blockchain account has one owner, and all or most are in use, this implies that only 1% of the applicable market share is penetrated right now. Naturally, this leaves a lot of untapped market share for digital assets to eventually capture.

Despite the 45 million blockchain accounts, the number of people that own Bitcoin and other digital assets is likely much smaller. Through some rigorous research, I estimated that roughly 20 million people owned Bitcoin around the globe in early 2019. 2019 was a relatively slow year for Bitcoin price wise, yet the number of blockchain wallets increased by roughly 37% YoY.

Still, due to the large number of lost or unused accounts, coupled with many users who have multiple accounts, I believe the actual number of people participating on the Bitcoin network is only around 25 million today (a 25% YoY increase, roughly in line with a 37% YoY rise in wallet creation). If my calculations are accurate, then only about 0.55% of the world's population with internet access are involved with Bitcoin and other digital assets, which leaves about 99.45% of the applicable market untapped.

Let us not forget about the Fed and its perpetual easing policy. The Federal Reserve System has continuously expanded the monetary base ever since its incorporation into the global financial order over 100 years ago. In fact, since President Nixon decoupled the dollar from the gold standard in the early 1970s, the monetary base has increased by roughly 4,300%.

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With debt levels at all-time high, and the extended nature of the current economic expansion, the Fed is very likely to continue to expand the money supply going forward. To delay the onset of a recession, to try and engineer a soft landing, and to stimulate economic growth following a recession, the Fed will very likely use various tools like zero or negative rates, as well as QE type programs.

Also, it is not just the Fed, as other major central banks continuously expand their fiat currency stockpiles as well. Once again, we return to the fact that Bitcoin and other true decentralized coins have set limits and cannot be inflated in proportion to fiat currencies. In fact, Bitcoin and other digital coins are essentially inflation-proof in this sense. There are only about 18 million Bitcoins in circulation now, and the max limit is just 21 million.

Furthermore, the more Bitcoins that are in existence, the more difficult the mining process becomes. In fact, the process becomes so complex, lengthy and difficult that the last Bitcoin is projected to be mined in 2140, 120 years from now. Therefore, central banks can essentially print as much fiat currency as they want, but the ever-growing supply of fiats in the global financial system should enable Bitcoin and other systemically important altcoins to go much higher long term.

In December, Bitcoin successfully retested the extremely important support level at $6.5K. Since then, Bitcoin and other digital assets have appreciated considerably. Nevertheless, this move is still likely in the very early stages of the Bitcoin development cycle and overall price appreciation.

There is positive news flow regarding Bitcoin's continued adoption as a mainstream investment vehicle. Moreover, the likelihood of a Bitcoin ETF and/or other mainstream investible products in the digital asset space appear to be increasing. The introduction of Bitcoin-backed investment vehicles should produce a spike in demand from retail as well as from institutional investors. In addition, the cryptocurrency complex should benefit greatly from such a phenomenon.

Bitcoin's network keeps growing, as about 99.0-99.5% of the applicable market appears to be untapped right now, and Bitcoin's set supply should enable its price to move up substantially once demand increases. Furthermore, demand could increase exponentially, or far more than is anticipated, which should reflect positively on many other prominent altcoins. Thus, prices for Bitcoin and many other altcoins are likely to continue to appreciate over the long term, in 2020 and beyond.

Potential Risks to Consider

Possibly, the No. 1 long-term threat Bitcoin faces is detrimental government regulation or an all-out Bitcoin ban. If major Bitcoin-friendly governments like the U.S., EU, Japan, South Korea, and others follow the footsteps of China and essentially make Bitcoin use and trading illegal, it could have catastrophic consequences for Bitcoin's price.

Continued Functionality Issues

Another risk factor is the concern that Bitcoin may never become a widely-used transactional currency due to its issues with speed, cost, and scale. Yes, the Lightning Network promises to solve many of the issues associated with speed, cost, and scale, but there's no guarantee that the LN will become widely adopted, even over time.

Therefore, there's the risk that newer and more efficient digital currencies like Litecoin, Bitcoin Cash, and others may make Bitcoin somewhat obsolete as an actual medium of exchange for the masses.

Continued Security Breaches and Fraudulent Activity

Continued security breaches in the Bitcoin world concerning exchanges and individual wallets are a constant concern. If significant breaches continue, investors and users may start to lose confidence in the system, and demand could decrease as well.

Likewise, there are fraud cases. In an industry that's still loosely regulated, substantial fraudulent activity is a persistent risk factor. Just like with security breaches when people get ripped off, it reflects poorly on the entire industry, and demand along with prices can suffer.

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Disclosure: I am/we are long BTC-USD, BCH-USD, LTC-USD, DASH-USD, ZEC-USD, XMR-USD, BTG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article expresses solely my opinions, is produced for informational purposes onlyand is not a recommendation to buy or sell any securities. Please always conduct your own research before making any investment decisions.

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Bitcoin: Why 2020 Could Be A Blockbuster Year - Seeking Alpha