The Fool's Game Of Annual Crypto Price Predictions
The price volatility of cryptocurrencies has been an issue investors have had to contend with over the past 14 months, and it doesn’t seem to be going away any time soon. That means clients active in or curious about cryptocurrencies have likely already encountered the wild world of annual cryptocurrency predictions.
Perhaps no headline better encapsulates the unpredictability of token prices than this one from CNBC on Monday: “The boldest bitcoin calls for 2023 are out — and a 1,400% rally or a 70% plunge may be on the cards.”
The most optimistic call. $250,000 by year-end 2023, was made by digital venture capitalist Tim Draper, according to the story, while the most pessimistic call, $5,000, was made by Standard Chartered. In rough estimates, that’s the difference between bitcoin having a $4.75 trillion or a $95 billion market capitalization.
Predictions for last year’s price performance did little better, with many skeptics guessing that bitcoin prices would plunge below $10,000, while optimists like Draper and Morgan Creek founder Anthony Pompliano guessed that they would breach the $250,000 mark in 2022. By comparison, Ark Investment’s Cathie Wood sounded relatively reasonable predicting that bitcoin would breach the $100,000 mark last year.
Of course, none of that happened. Prices steadily legged downward as central banks continued monetary tightening and a series of bad headlines dented investor sentiment, but they never reached the depths predicted by the most dire bears.
Why prices are so difficult to predict
As we’ve written about before, cryptocurrencies operate on different fundamentals from traditional investments, and investor sentiment plays a much larger role in determining prices. Human sentiment is notoriously unpredictable and can be significantly impacted by unforeseen events.
This is true across asset classes, not just in crypto. Which is why analysts generally suck at making one-year stock market predictions, too. In late 2021, when Wall Street was making its 2022 stock index forecasts, every major analyst was predicting at least a modest rise in the S&P 500 for the year. Obviously, it just wasn’t to be.
Read more: FTX and Crypto Bust Show Capitalism’s Limits
That’s part of the reason long-term investment prognostication is rarely taken seriously. Excessively pessimistic and optimistic calls – like 1,400% increases in value or 70% declines – make for good headlines, but rarely ever turn out to be right.
Why crypto is so much more uncertain
I think investors are waiting for clarity. Cryptocurrencies are still viewed as speculative investments by most investors interested in the asset class. When central banks tighten the spigot on easy money, one of the first places investors pull back is in speculative assets – they run for safety.
There are also a lot of what former U.S. Defense Secretary Donald Rumsfeld would call “known unknowns” around crypto right now. These range from the simple existential questions – like “will this token collapse in 2023?” and “will I be able to access liquidity” – to questions around regulation, access and custody that policymakers still need to answer.
We can add to the known unknowns all of the issues facing all financial markets right now: inflation, rising interest rates and potentially a recession in the coming year.
Then there are the myriad “unknown unknowns,” in Rumsfeld’s parlance. These are the black swan-like problems that we can’t see coming, like the collapse of FTX. We can’t know if and when another decentralized finance project or stablecoin fails or another digital exchange falls apart in 2023. Given the still young and wild state of the digital assets space, I think it’s fair to guess that there will be more bumps in the road moving forward.
What advisors can say
I am not an advisor, nor am I a financial analyst, but as a journalist covering the space I get questions from friends and family members all the time: What will the stock market do? What is happening with the economy? What is going to happen with crypto?
My go-to answer about the markets and asset prices is that they will fluctuate. Not only does this reflect how I feel about the volatility of risk assets like stocks and cryptocurrency, but it gives a reasonable prediction for what will happen over the next 12 months. Will prices end up higher or lower? I don’t think anyone is able to guess that accurately.
However, the more important answers that advisors can give their clients revolve around this: why cryptocurrencies are being invested in and what they are being used for in the context of an overall investment strategy or portfolio. Advisors using cryptocurrencies as part of a coherent investment strategy are thinking about these assets in terms longer than a mere 12 months.
Similarly, if cryptocurrencies are being used as part of a long-term wealth strategy, annual performance should not be the focus. Rather, the end-client and advisor need to ask themselves what they think bitcoin, or ethereum, or any other altcoin they are considering will look like at the time liquidity is needed.
Will these tokens survive to, or through, a financial horizon like retirement? Will there be opportunities to liquidate or add to positions? These are the important questions.
As 2023 begins, let’s resolve not to be distracted by garbage predictions rendered futile by short-term volatility.