Why Rapidly Rising and Falling Bitcoin Prices Don't Rattle the Expert Buyers

The rapidly rising and falling Bitcoin prices we've seen so far this year might seem alarming to those unfamiliar with the digital currency.

But to those who have been closely involved with Bitcoin over the past few years, the recent steep climb (213% in nine weeks) and sudden plunge (31.6% in three days) is well-worn ground.

In fact, many longtime Bitcoin owners were expecting a crash in the days leading up to the May 25 all-time high of $2,791.69.

I was one of them.

I first wrote about Bitcoin in June 2011, just days after one of the early Bitcoin crashes. The price of Bitcoin fell from $32 to $10 in four days, a 68% drop. The decline continued at a slower pace through November, bottoming out at $2 for a total decline of 94% in just five months.

We Bitcoin veterans have endured many more crashes since then...

Why Falling Bitcoin Prices Are Nothing to Fear

One Bitcoin price crash came in August 2012, when the Bitcoin price fell 51% in about three days, from $15.25 to $7.50. Less than a year later, in April 2013, Bitcoin crashed nearly 80% within hours because the Mt. Gox exchange (the dominant Bitcoin exchange at the time, with about 70% market share) went down.

And of course the biggest Bitcoin crash came with the protracted collapse of Mt. Gox in late 2013 and early 2014. In the fall of 2013, a surge in global interest pushed the Bitcoin price up more than a 1,000% in just four months.

But through mismanagement and theft of the Bitcoin it held, Mt. Gox became insolvent. When it finally went dark in February 2014, Mt. Gox admitted it had lost 850,000 bitcoins. The news sent Bitcoin tumbling 63% in less than three weeks.

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So when the Bitcoin price chart started to go parabolic in the middle of May 2017, the "old-timers" knew how it would play out.

I was prepared. I set up a series of price alerts with the Coinbase app on my iPhone, set to inform me every time the Bitcoin price crossed another $100 threshold.

I knew the price of Bitcoin had reached a critical stage when I woke up the morning of May 25 to see two price alerts had triggered while I slept.

I sent out a warning on Twitter at 8:36 a.m. Eastern time May 25:

Less than four hours later, the Bitcoin price started dropping.

Some mainstream media put out ominous headlines:

• CNBC: "Bitcoin correction sees nearly $4 billion wiped off value of the cryptocurrency as price falls 19%"
• The Telegraph (UK): "The Bitcoin bubble is back - but investors should avoid it"
• Barron's: "Bitcoin and Tech Stocks: A 21st Century Tulipmania?"

But Bitcoin owners with long memories were unfazed. In fact, many welcomed the decline in the Bitcoin price as a fresh buying opportunity.

"What crash are you talking about, didn't notice anything," wrote Naturecollision on Reddit.

"Every crash makes Bitcoin stronger. People see that it always rebounds and even the weak hands who sold become convinced of Bitcoin's inevitable domination," wrote another Redditor, DonaldCruz.

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"Lol the second it 'crashes' I'm buying even more... and holding long term. So, please... be my guest, CRASHHHH!!!" said Redditor "GoldenCocaine."

In short, the recent Bitcoin price rise and fall is business as usual for the world's No. 1 cryptocurrency.

What matters now is what comes next. Here's what investors can expect...

Why the Bitcoin Price Will Keep Rising in 2017

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While Bitcoin did get overheated over the past two months, it was rising for several solid reasons. Most of these are long-term catalysts:

• Japan made Bitcoin legal tender on April 1, setting off a tsunami of interest in the digital currency there.
• Also in April, Russia reversed its policy on Bitcoin. Instead of seeking prosecution against those using Bitcoin, the Russian central bank is now forging a new law that will recognize cryptocurrencies as digital goods (which will be taxable, naturally).
• A surge in interest in other cryptocurrencies this year has also boosted Bitcoin. The reason is that traders often can't buy other digital currencies with fiat currency such as dollars, but only with a major cryptocurrency such as Bitcoin or Ethereum.
• More money is coming into Bitcoin from hedge funds and other institutional investors.
• As retail investors watch the steep price increases, more of them are buying Bitcoin as well.

What you have here is a sharp increase in demand running up against a supply that can't rise to meet it. The Bitcoin software maintains a steady rate of creation of new bitcoins - currently just 12.5 bitcoins every 10 minutes.

And the network is designed to further contract supply over time. The next "halving" of the block reward, due in 2021, will cut the supply to 6.25 every 10 minutes.

In addition, many Bitcoin investors buy and never sell - the so-called "hodlers." (Hodl was an accidental misspelling of "hold" on a Bitcoin forum in 2013 that was quickly adopted by long-term Bitcoin owners. Later some derived this acronym from it: "hold on for dear life.")

The buying pressure and constricted supply haven't changed. That's why the Bitcoin price found support around $2,000.

This also means that before the end of 2017, Bitcoin is a near-lock to revisit and then surpass the all-time high it reached last week.

And one key development could push Bitcoin significantly higher very quickly...

Why Bitcoin Could Shoot Past $3,000 This Summer

Last week a group of key members of the Bitcoin community came together to propose a compromise solution to the two-year-old debate on how best to scale the network. Until now the two sides have remained far apart even as the problem has grown more critical.

Without a solution, Bitcoin can't grow to meet new demand. The new proposal is an "all-of-the-above" solution that should appeal to a majority of the Bitcoin community.

If that happens - and we should know as the proposal moves forward over the summer - it will remove a major millstone from the price of Bitcoin. It would likely cause a Bitcoin price spike in the 20% to 25% range.

That alone would push Bitcoin past the $3,000 mark. And the rising demand over the next seven months will keep putting upward pressure on the price. Assuming a scaling solution does happen, we could even see Bitcoin approach $4,000 by the end of the year.

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