Don't get too excited about $300,000 bitcoin just yet

The recent Bitcoin bull run seems to be unstoppable and a Citibank analyst is predicting it could “moon” to heights of $300,000 by the end of next year. Is he right?

Bitcoin is back. The cryptocurrency has smashed straight through the $18,000 barrier and its momentum does not appear to be slowing. There is more interest among investors than ever before.

• According to research from Fidelity, a growing number of institutional investors believe digital assets should be part of their portfolios.

• Intercontinental Exchange recently reported record trading volume for its bitcoin futures.

• Earlier this year billionaire investor Paul Tudor Jones announced he was investing in bitcoin via futures traded on the Chicago Mercantile Exchange (CME).

• Online brokers have also reported record trading volumes, as crypto derivatives are added alongside more traditional instruments.

• Avanti Financial, targeting institutional investors, was granted a bank charter last month. The bank plans to custody crypto assets and offer a tokenized US dollar along with other blockchain-based services.

In this context, Citibank analyst Thomas Fitzpatrick predicted that Bitcoin could be worth $318,000 by the end of 2021. This will be music to the ears of many cryptocurrency investors. But before you rush off to buy Bitcoin, we might need to throw some cold water over your dreams.

It Is Difficult to Draw Long-Term Price Points From Trend Analysis

While Fitzpatrick is probably correct that we are entering a sustained bull period, his price prediction needs to be taken with a hefty sprinkling of salt. That begins with Fitzpatrick himself. ClassicMacro on Twitter has pointed to the analyst's bullish gold and silver predictions as a sign that the analyst tends towards bold price predictions:

The analysis itself is based on Bitcon’s previous performance and supposed similarities to the gold market in the 1970s. Fitzpatrick's argument is based on two assumptions:

1. Future price movements will be like past ones
2. The macroeconomic climate towards transnational stores of value will be favorable

Based on this, he concludes that Bitcoin could have the momentum necessary to reach his price target. This sounds promising. However, there are two key problems with the analysis.

The first is that while trend analysis is an excellent way to understand why something happens, it is not a useful tool for creating actual price predictions over the long term. It simply tells us that the price is likely to move up.

The second is that while Bitcoin is often called “digital gold” it isn’t gold. The price of Bitcoin is influenced by a number of factors, including regulatory challenges and other cryptocurrency trends, such as Decentralized Finance.

Bitcoin and Cryptocurrency Have Stronger Fundamentals Than 2017

While the $318,000 price target should be viewed with skepticism, Fitzpatrick is likely correct about one thing. Bitcoin is entering a new bull period and it is probable that we will see significant price increases over the course of the next year.

The reason that this run might have more steam behind it than previous bull-runs is that the crypto market has fundamentally matured over the past few years. The booming DeFi sector has had problems. But the emergence of projects like Yearn.Finance, Compound, and Uniswap are building the foundations of a fully functional crypto economy, with instruments like lending and financial derivatives.

Additionally, there have been significant increases in mainstream adoption over the past year. Most notably, there is the decision of payments giant PayPal to offer Bitcoin payment services within its own network. This significantly increases the reach of Bitcoin and will go a long way towards normalizing cryptocurrency adoption.

Most importantly, it will expose PayPal’s 24+ million merchants to Bitcoin as a payment method, which should increase its utility and decrease volatility. Taken together this means that we are likely to see a significant year on year price increase for Bitcoin and other cryptocurrencies towards the end of 2021. However it is difficult to quantify exactly where that figure will land, it is unlikely to be as high as $318,00, but we can certainly dream.