Amid Uncertain Future Prospects, Bitcoin Seems Undervalued for Now

Bitcoin, once preferred by the investors, is rapidly falling off the favor with cryptocurrency recording its new low in November to fall below $4,000. In fact, the current value of cryptocurrency is the lowest since its valuation in September 2017. The current degradation in Bitcoin’s value can be attributed largely to the uncertainty prevailing in the market which has kept the investors on the hook and forced them to follow a buy-and-hold strategy.

Regulatory authorities and policy effects

The investors were initially hopeful that U.S Securities and Exchange Commission (SEC) would allow Bitcoin Exchange Traded Fund (ETF) and that would surge the prices of the cryptocurrency. However, the SEC’s decision to defer the issue until February 2019 has dampened the spirit. Further, the absence of proper market surveillance and custody procedures mean there’s no immediate relief on the horizon.

Is this devaluation genuine?

Many believe it is not, and the concerns of the stakeholders have been fanned out of proportion. For example, the number of Bitcoin users has seen a spurt in the few last months and more importantly, its transactional volumes have reversed (towards the positive) in the period from August to September (although purely owing to the current sell-off). Forbes Bitcoin value estimator – an index that utilizes Bitcoin users and its volume transactions to estimate its price – pegged the Bitcoin value at $4,900 which is around 30% more than its current market value.

How Bitcoin’s price is determined?

Like other currencies, market forces, i.e., supply and demand determine Bitcoin price. Specific to the Bitcoin demand are the two factors – the number of users and the volume of their transaction. The supply, on the other hand, is determined by the available number of Bitcoins the quantity of which is capped. Notably, out of capped quantity, 80% of the Bitcoins are already mined. Therefore, in the current scenario, it’s wise to focus on demand to estimate its price evaluation.

Role of market sentiments

A quick analysis of evaluation trends reveals that for most of the part Bitcoin prices have primarily remained dependent on the number of Bitcoin users and its transactional volume, barring last few months of 2017 when media hype and euphoria surrounding cryptocurrencies pushed it to a surreal level of $20,000. However, since then the value of Bitcoin moved in tandem with the news that either signaled its enhanced adoption or reduced consumption. Thus, it can be safely concluded that despite being volatile in nature, the Bitcoin valuation largely falls in line with the prevailing market sentiment and investors’ perceptions.

For the last few months, investors were pinning Bitcoin’s revival hopes on SEC’s decision to approve Bitcoin ETF. This decision would have made Bitcoin a mainstream investment option and accessible for the institutional and retail investors. This, in turn, would have increased the number of Bitcoin users and transactional volumes of the cryptocurrency; thereby, enhancing its market value. However, much to the dismay of the investors that didn’t happen as SEC decided to defer the matter to the next year.

What’s the path of revival?

Much depends on the SEC’s decision about Bitcoin ETF in February next year. A decision in favor could certainly surge its value beyond $10,000, but if that doesn’t happen, Bitcoin could very well plunge to its new low, even below $2,000 mark.