Bitcoin Peeks Its Head Up

Paul Krugman recently wrote about bitcoin: “What problem does it solve? I have yet to see a clear answer to that question.” His argument is that the dollar – in virtual and physical manifestations – does a better job than any crypto currency at efficiently holding records of accounts, acting as a store of value, and enabling transactions. And, although we are more crypto fans than critics, Professor Krugman is correct on this point.

Our answer to his question: “Most of the world does not have the benefits Americans enjoy when it comes to currency and banking systems.” In the tougher corners of the globe, asset storage/wealth preservation is a luxury for the elites (and only because they have access to dollar/euro based accounts and currency). For everyone else – and we’re talking about billions of people – local governments and financial systems afford few of the protections Krugman assumes in his question. His naivety on this issue is startling, to be sure, but nonetheless perfectly apparent.

To highlight this point, consider where Google Trends shows the greatest number of “bitcoin” searches around the world. The top three are South Africa, Nigeria, and Ghana. Incremental search interest drops off considerably (25%) after those countries. Just Google the latest news from any of those three countries to understand why bitcoin would be of interest to these populations; all fit our explanation of its utility. The United States only comes in #15 on the “bitcoin search league tables”, at levels half of those of the top 3.

With Dr. Krugman’s question answered we can turn our attention to bitcoin’s current fundamentals. We use a two-step approach: global Google search trends for “bitcoin” as a query and bitcoin wallet count growth. The first is a proxy for general interest. The second measures how much of that translates into new accounts. Since bitcoin’s issuance growth is fixed, marginal demand strongly informs price. Here’s the latest data:

Google Search Trends. Bad news first: global search volumes for “bitcoin” are 88% lower than their peak last December. Interest here is a shadow of its former self when bitcoin prices were peaking and everybody wanted in.

On the positive side: interest as expressed by global Google searches seems to have bottomed. Over the last 90 days search volume is fairly constant, with no new lows since June 9th. Bitcoin bottomed for the YTD three weeks later, at $5,882.

Source: https://trends.google.com/trends/explore?date=today%203-m&q=bitcoin

Bitcoin wallet count growth. Here are the monthly percentage growth numbers since the start of the year:

• January: 5.7%
• February: 2.8%
• March: 2.5%
• April: 2.2%
• May: 2.3%
• June: 2.9%
• July: 4.8%
• Source: https://www.blockchain.com/charts/my-wallet-n-users?

Here is how these numbers fit with bitcoin’s price in 2018:

• From January to April, bitcoin dropped from $17,000 to less than $7,000 as wallet growth slowed from the January highs to less than half these levels.

• Even though wallet growth picked up slightly in May/June, it was not enough to halt further declines. As mentioned, the YTD low occurred June 29th at $5,882.

• July’s move from $6,400 to $7,700 correlates neatly to acceleration in wallet count growth of near 5% versus 2-3% earlier in the year.

Summing up: we’ve covered bitcoin longer than any other Wall Streeter, so we know enough not to call a bottom on this notoriously volatile asset. To do so, we need to see August wallet growth continue at July’s pace and search trends start to head higher. That’s entirely possible: when it starts to trend higher bitcoin captures the global imagination faster than anything else we’ve seen in 30 years of financial analysis.

Krugman’s Full Article: https://www.nytimes.com/2018/07/31/opinion/transaction-costs-and-tethers-why-im-a-crypto-skeptic.html