Don't be fooled when you see a Bitcoin price prediction that calls for a collapse in the digital currency.
Those predictions are mostly based on the bursting of the Bitcoin bubble. Bitcoin prices soared 8,500% in 2013 only to fall 85% by this past January.
But the critics have misread what the charts are saying.
All they see is a long downtrend. It buttresses their belief that Bitcoin has no value and that its demise is inevitable.
But these critics miss several key points. The truth is, now that it's post-bubble, Bitcoin is finally finding its true value...
First, critics typically liken the Bitcoin bubble to the infamous Dutch Tulip Bulb Mania of 1634-1637.
In that case, imported tulip bulbs went from being a somewhat pricey luxury to a wildly speculative investment. Prices soared some 1,500% within a few months. When some started to cash out, the whole thing crashed. In less than a month, prices for the once-prized bulbs fell 99%.
Bitcoin, however, is not that kind of bubble. The tulip bulbs had little practical value; they were just pretty flowers.
Instead, the correct way to view the Bitcoin price trend is to look at the U.S. housing bubble...
From 1999 to 2006, U.S. home prices soared 80%. But housing was never worthless. Homes were simply overpriced.
When the housing bubble burst in 2005, prices started to slide back toward the long-term trend - the true value. By 2008, home prices were down 40% from the peak. But those prices were close to levels where they would have been if the bubble had never happened.
That's what's happening with the Bitcoin price. Bitcoin's price decline is similar to what happened to the U.S. housing market, not to Dutch tulips.
You see, Bitcoin - unlike a tulip bulb - has value.
As a digital currency, it can transmit money between any two parties anywhere in the world without the need for banks. And startups have only begun to explore the uses for the technology underpinning Bitcoin, the blockchain.
So what the Bitcoin price chart shows us is a price seeking its true value - like housing.
But that's not the only reason the Bitcoin bubble isn't as significant as most of its critics think.
This one, ironically, has to do with how the Bitcoin bubble was inflated...
As it turns out, the Bitcoin bubble was artificially driven - at least in part.
We know this thanks to the hard work of WizSec, a Bitcoin security firm. WizSec continues to investigate the activity of a trading bot on the Bitcoin exchange Mt.Gox during the bubble period.
Known as "Willy," the company has discovered that the bot created dozens of accounts, often using fake U.S. dollar balances, to buy large amounts of Bitcoin at regular intervals.
In other words, it wasn't a bunch of wild-eyed speculators driving up Bitcoin prices in late 2013. This one bot was often responsible for anywhere from 25% to 90% of the total trading volume on Mt. Gox.
Willy first appeared in September of 2013, just before the Bitcoin price began its steep climb. Its activity corresponds closely with spikes in the price of Bitcoin.
Of course, volume at the Chinese Bitcoin exchanges also ramped up during this time. That part of the bubble, at least, apparently was driven by human trading. But even the rising interest in China in Bitcoin would not have pushed prices so high were it not for Willy.
The bot interfered with the normal price discovery mechanism of the market by buying at regular intervals through late January of 2014. The bubble had burst. Willy started selling large amounts of Bitcoin at that point, accelerating the collapse.
Take Willy out of the Bitcoin bubble and you have a much smaller bubble. You also would have much less dramatic declines on the Bitcoin charts. And without those steep declines, it gets harder to argue that Bitcoin is doomed.
For more evidence that Bitcoin will survive its bubble experience, look at the price over the past two months. After hitting a post-bubble low of $177.28 on Jan. 24, the Bitcoin price has clawed its way higher.
Now flirting with $300, the price of Bitcoin is close to where it was at the start of 2015. While the art of Bitcoin price prediction is challenging at best, this two-month uptrend looks like the foundation of a recovery. The positive move is its longest and steadiest since the start of the 2013 bubble.
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It's also important to note that even January's low was well above Bitcoin's $90 to $125 trading range in the months before the bubble took off.
So while the worst is over for Bitcoin, what kind of Bitcoin price prediction can we make now? And is it worth buying in its current $290 to $300 range?
Several Bitcoin companies have tried to answer this question by coming up with a fair value for the cryptocurrency.
Pantera Capital created the BitIndex last year. It's based on such factors as developer interest, merchant adoption, Google searches, and transaction volume. As of Wednesday morning, the BitIndex put the fair value of Bitcoin at $370.
ALFAcoins, a Bitcoin payment processor based in the British Virgin Islands, has also developed a formula for figuring out what a Bitcoin should be worth.
Inspired by Benjamin Graham, the "father of value investing," the ALFAcoins formula uses the cost of Bitcoin mining to arrive at a fair value.
ALFACoins publishes its Bitcoin fair value price on its ALFAquotes website. As of Wednesday morning, the formula put Bitcoin's value at $496.56 - 70% higher than the current market price.
Investing in Bitcoin: It will be several years before Bitcoin goes fully mainstream, but investors now have an easier way to profit from the digital currency. The Bitcoin Investment Trust (OTCMKTS: GBTC) has regulatory approval to go live within the next couple of weeks. It's just one more sign that Wall Street is becoming a believer in Bitcoin...
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