Bitcoin and other cryptocurrencies have been on a wild ride this past year. The hype is real, the prices are skyrocketing, and we’re all feeling like we missed out as “true” investors. But as much as I would love to just gloat about how many coins I bought at $500 that today are worth $10k each (I didn’t), there’s something important to remember: price predictions for cryptos aren’t always what they seem. And if you really want to make money off your investment, it’s time to take a look at why these forecasts can be so misleading – or even dangerous!
Let’s face it: everyone wants their investments to grow quickly and exponentially. We dream of buying our favorite coin at an ultra-low price, and then waking up to a 100% increase. But as we know, such dreams usually end in tears (and I’m not just saying that because I missed out on $100 of Ethereum). As fun as it is to see your portfolio grow every day, the more important question here is: why do people keep predicting insane growth for cryptocurrencies?
The answer is simple: greed. But in a way, they’re not wrong. As it turns out, there’s a really simple formula to determine if a price prediction is accurate or not – and the only thing you need to know is how it was made in order to make your own forecasts. We’ll discuss both methods in this post, and if you’re wondering why the various price predictions for Bitcoin vary so much, I’m going to explain that at the very end of this article.
1. What is a cryptocurrency and how does it work
Briefly put, cryptocurrency is a digital currency predicated on cryptography and peer-to-peer network architecture. It is the latest step – and by far the most impressive one – in the ongoing attempt to create a universal currency and democratize financial markets. Blockchain technology allows it to exist entirely as bits of information distributed all across the Internet; unlike fiat currencies, there is no central entity and no one who can control it.
But why should you care about this? If you’re reading this article, chances are that you already know at least a bit about cryptocurrencies and how they work. The more important question here is: is it worth buying any of them? Sure, digital currencies might be the way of the future, but there’s no telling whether Bitcoin will still be the most popular one in a year from now. After all, it is just another form of investment – and you know what they say about investments…
Well, put simply: the less promising an asset is, the higher its potential returns. This has been true for most of human history, and there’s no reason for it to be different this time. And if that is the case with cryptocurrency as well, then you can see why price predictions have been so spectacularly wrong up to now. Remember: they’re predicting how much a certain asset (cryptocurrency) will be worth in the future – not how much it is worth right now.
2. Exponential growth and market saturation
Let’s take a look at a few online articles that promise insane gains if you buy their coin of choice right now before it hits $10/coin (we’ll use Bitcoin as the example here). Surely, such claims can’t be entirely without merit, right? I mean, if there was any chance for this currency to be worth double its current price in the foreseeable future, doesn’t that make it a sound investment?
Well, not quite. As we said before: when we predict how much something is going to be worth in the future (cryptocurrency), what we’re actually predicting is how much its demand will increase in that timeframe. And if that’s the case, then you need to take into account how much supply there is as well. After all, getting something for less than it’s worth has never been a good strategy – no matter what the item is.
And here’s where two methods of price predictions differ greatly:
- The first one (the one you typically see online) takes the current market value, figures out how much the demand is expected to increase, and then concludes that the price of the said currency will be x times higher in y years.
- The second method (the one we’re going to use here), on the other hand, works like this: it defines market saturation as the point where the market value equals its maximum potential price. It then calculates how much demand needs to increase every year in order for said market saturation to happen, and forecasts what that would do to the value of cryptocurrency over time.
The difference is simple: if we go with method one, we will constantly be faced with absurd predictions of future price increases (exponential growth). Many will fail to materialize, and in a few years, we’re going to have a bunch of digital currencies whose value is nowhere near what it used to be.
But if we go with method two, then we come up with much more realistic forecasts that keep the exponential growth in check – allowing us to make better predictions without constantly having to go back and revise them.
3. Why you cannot always trust price predictions
First off, we need to take a look at what makes an accurate forecast in the first place. After all, even though these price predictions are often made by the same people who make them every year, we can’t really take any of their word for it.
Since there’s no such thing as a future price that is known in advance (Bitcoin could become worthless tomorrow and lose all of its market value), we cannot call any prediction about the future price accurate until we’re actually there. However, we can determine the accuracy of a prediction at any given time by comparing it with what actually happens.
What does this mean? Let’s say that in 2020, someone tells you that Bitcoin is going to be worth $100k in five years. He doesn’t give you an explanation as to why he believes so, even though you ask him for one.
Well, if you were to ask the same person how much a single unit of cryptocurrency would sell for in 2020, he would have a very good answer for that: around $100k. This means that his previous statement was actually a very good (though very ambitious) prediction for the price of BTC – under the conditions that it would sell for $100k at some point within five years.
This is an example of what we call “accurate predictions”, and you can see why they’re so valuable: if someone predicts, for example, that Bitcoin will be worth around $10k in 2020, but it actually happens to sell for more than that, then they will have made an accurate prediction.
On the other hand, if people make predictions about the future price of cryptocurrency every year and none of them ever comes true… Well, that means either they are terrible at making forecasts or their predictions are bogus.
4. The factors that can affect the cryptocurrency prices
Now that we’ve learned when a price prediction can be called accurate, let’s take a look at the factors that have to be taken into account when you’re trying to forecast nothing less but the entire future of cryptocurrency.
1) The total market capitalization
Market capitalization is easy enough to understand: it describes how much money there currently is in the entire cryptocurrency market.
It goes without saying that a higher market capitalization would mean that there is more money to spend on new and existing cryptocurrencies – which means that popular and established currencies can grow faster than those with smaller market caps.
The reason we’re putting this as number one is simple: no currency will increase in value if there is no demand for it in the first place, and you can’t get demand if there isn’t enough money to spend.
So, this means that the more money there is out there (the higher the market cap), the faster cryptocurrency prices are likely to rise – since even a small increase in price will result in huge gains when expressed as a percentage.
2) The number of active users
In much the same way, a higher user base will result in faster price growth. But why would that be the case? Don’t we just have a larger pool of people to spend our money on established cryptocurrencies – meaning that these prices won’t see any major spikes unless they reach mainstream adoption?
Put simply, yes. But there’s more to it than that.
Let’s say you have two cryptocurrencies: one with an active user base of 10 people and the other with 100. Even if they both manage to grow their market cap by 50% in a day (which is impressive), the one with only 10 users would see its price rise 10-fold – while the other would only double in value.
9 people out of 50 will not be able to spend their coins at all, and some of them may not even want to: after all, they bought the coin precisely because it’s cheap and affordable for non-rich users like themselves. As such, you can see that a larger user base does not always translate to faster price increases – and that is why we say that it is just another factor.
3) When the price predictions were made
We do need to mention this one: not all accurate price predictions are equal in terms of how much impact they will have on cryptocurrency prices. For example, if someone predicts that Bitcoin will be worth $1 in 2020, it’s not likely to cause much of a stir.
On the other hand, if someone predicts that Bitcoin will go from around $6k (where it is right now) to $50k within three years – that would certainly get people talking, and most probably buy BTC already. After all, there’s a difference between $1 and $50k.
4) Technical analysis of the cryptocurrency charts
You may or may not have heard of it: technical analysis is a methodology that uses past price movements to predict future prices. And just like we said earlier about market capitalization and number of users – it can be useful to know when someone says that the price of a certain coin will rise and fall within a particular period.
However, if we had to pick one factor that is most likely to affect cryptocurrency prices in the near future – technical analysis would be it. Why? Because many people don’t just predict what’s going to happen: they try to figure out when it’s going to happen.
And since many people are buying cryptocurrencies on the basis of technical analysis, you can bet that certain currencies will experience some short-term price increases if their charts look good.
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In conclusion, crypto price predictions are not all created equal – and knowing the factors that affect them (market capitalization, number of users, timeline when people make their predictions, etc.) will help you understand the market better.
As a final note: Try to avoid buying cryptocurrencies just because their prices are predicted to rise. They may not do that, or may even lose value instead – meaning that you would have bought at a higher price than the one you could’ve gotten.
Only invest in what you’re willing to lose!