Bitcoin Price Prediction: How to Predict Spikes and Crashes

As we head towards the end of the year, bitcoin is in the news again and investors are looking for bitcoin price prediction advice—but it isn’t always this way. What tends to happen with bitcoin is that there are months or years in which it moves along in the background, before the price soars, it’s all over the news, and retail investors are left wondering why they weren’t buying up relatively cheap bitcoin a year earlier.

Looking at bitcoin’s price movements, it could seem like a risky investment, but at the same time, gains have been huge and if you’re looking for decent returns (and the returns on bitcoin have been, historically, way better than just decent), then you need to be looking at assets and industries with a lot of movement. And if there’s one thing not lacking in the world of bitcoin and other cryptocurrencies, it’s movement.

You may be wondering, then, what’s the best way to take advantage of bitcoin’s volatility, and how can we predict the spikes and the crashes?

Technical Analysis

The first thing you might want to do is brush up on your Technical Analysis skills. Technical Analysis is a time-honored trading discipline, first introduced at the end of the 19th century, and used in the analysis of stocks, futures, commodities, currencies, and really any kind of asset class that is tradeable on markets.

It takes all the detailed information and trends around trading activity, and from past data attempts to make future predictions. Technical Analysis can appear complex and mathematical, with a wide range of analytical tools to be mastered, but the core principles and most commonly used devices can be actually be picked up relatively easily.

Bitcoin can make dramatic swings on short time scales, so if you’re looking to profit from these fluctuations, then Technical Analysis will help you make a bitcoin price prediction on hourly and daily scales.

Fear and Greed Index

The Fear and Greed Index measures just those things: fear and greed, and gives a score indicating whether market sentiment is, well, fearful or greedy. This will not help much on an hourly or daily timescale, as Technical Analysis can, but if you’re zooming out to a weekly or monthly scale, then it becomes a useful indicator of where trends are heading.

In a way, it sounds too simple, but essentially, this is how markets—and especially crypto markets—often operate, with the latest bitcoin price prediction relating directly to crowd psychology. Fundamentally, when the market is deeply fearful, then you buy, and when there is exuberant greed and a sense of euphoria, then you sell. Another way of putting this is that you make the contrarian trade, doing the opposite of what the crowd is clamoring for. Or, even more simply: buy the red and sell the green.

It’s worth noting that using the Fear and Greed Index works best when it’s at its extremes: the highest levels of fear and greed are strong indicators, but when it’s ranging in the middle it won’t tell you much.

Halvings and Cycles

Bitcoin goes through a process called halving, which occurs roughly every four years. This relates to block rewards and mining, but you don’t need to go into the technicalities if you don’t want. The key point, as a trader looking for a reliable bitcoin price prediction, is that there appears to be a very clear price cycle related to these halvings.

Pull up historical price charts with the halvings marked, and you’ll see that a four year pattern repeats, and you can make predictions accordingly. However, a caveat to this is that bitcoin only came into existence in 2009, so there simply haven’t been enough halvings to know whether or not this pattern of repetition will always continue.

Overlay with Gold

As indicated in the previous point, you can overlay the four year halving cycles and get a good idea of where bitcoin will be heading if the pattern holds. However, another interesting historical repetition appears as though it might be unfolding. Take a chart of the price of gold in the 1970s, and overlay it with a chart of bitcoin’s price since its launch and over the past decade, and you’ll see a remarkable similarity, which can be projected forward.

This repetition makes sense if you are of the view that bitcoin is becoming a store of value and could, as an asset class, become a digital equivalent to gold.

Dollar Cost Average and Hold

Finally, you might want to zoom out to the furthest macro level, and take a look at the trend over the whole of the last decade. At this scale, things look very different, as bitcoin trends consistently and relentlessly upwards.

If you believe that bitcoin is here to stay, and that we’re transitioning into a more digital future in which blockchain technology and decentralized finance play key roles, then dollar cost averaging is your best bet. This method means buying a set amount of bitcoin at regular intervals, regardless of market conditions, and holding it for the long term. You can, of course, invest more or less at certain times if conditions are extreme, but on the whole you stick to the plan.

This way, the ups and downs will offset one another and you’ll ride out the turbulence. Then, you can return to your investment in five or ten years and see how your longer-term bitcoin price prediction is playing out.

What Happens When All Bitcoins Are Mined?

Bitcoin is a highly volatile digital asset, and if you follow its price closely you'll grow used to dramatic swings. This makes it appear risky, but also provides the opportunity to profit. And you could argue that if you take a long-term view, then it's not so risky at all.

In fact, quite the opposite: zoom out, and the macro perspective shows an asset that has since its inception moved consistently upwards. That's why a lot of bitcoin buyers choose to just accumulate and hold, knowing that when all bitcoins are mined, there will be no more than 21 million in existence, that number having been set since launch.

This leads to other questions, though. Currently, bitcoin is still being mined into existence, but how exactly does that process take place and, in the end, what will happen when all 21 million bitcoins are mined and in circulation?

How is Bitcoin Mined?

When people talk about mining bitcoin, what they're talking about is miners using computer equipment to solve complex mathematical equations. These equations allow transactions to be processed on the bitcoin blockchain, and whichever mining rig (meaning the miner's computer set up) wins the race to solve the equation receives block rewards for their efforts.

These block rewards provide a powerful incentive to the miners, by releasing new bitcoin which the miner takes possession of as payment for their work. In this way, transactions are verified, the network operates securely, and new coins are created.

Regular Halving

The block rewards go through a process known as halving, which takes places every 210,000 blocks, equating to about four years. As the name suggests, the size of the block reward halves each time this happens, and has gone from an initial size of 50 bitcoin in 2009, to, at the last halving in May 2020, 6.25 bitcoin per block. There are now more than 18.7 million bitcoin in existence, but the total supply is not projected to have been fully mined until the year 2140.

Different Rewards

One effect of the halving process is that it will become less profitable to mine bitcoin if miners are relying only on block rewards as an incentive. What this might mean in practice is that miners will eventually come to take their profit not primarily from block rewards, but from transaction fees.

However, there are a couple of caveats to this. The first is that how much of an incentive block rewards continue to be depends on how much the cost of bitcoin continues to increase. If rewards halve, but the value of bitcoin makes significant gains, then the reduced block size is offset, at least partly, by the increased value of a bitcoin.

The second consideration is that when talking of transaction fees, we have to be aware that it can't be known how many transactions are going to be taking place in the future. A lot of transactions equals plenty of accompanying transaction fees to be claimed, but if there are few transactions, then there's less incentive to mine. When projecting forwards then, we have to consider what exactly we expect bitcoin to become.

Medium of Exchange or Store of Value?

Fast forward to 2140, when all bitcoin should be mined. What will we be using bitcoin for, if it's more than just a historical curiosity? If you believe that bitcoin is here to stay, then there are two clear possibilities: the first is that it becomes an actual currency, in use widely as a medium of exchange.

Bitcoin maximalists (the truest of true believers) speak of something called hyperbitcoinization, an ultimate endgame in which bitcoin takes over as a global currency, central banks are no longer needed, and all goods and services are priced in bitcoin.

The second possibility is that bitcoin becomes not a means of transacting but a store of value, similar to gold. This is easier to imagine, and there are those who say it's already functioning in such a manner, despite its volatility. Maximalists, though, would point out that bitcoin's pseudonymous creator (or creators), Satoshi Nakamoto, intended it to be used as money, and that one country—El Salvador—has already authorized it as legal tender.

Institutional Adoption

When looking at bitcoin's price volatility, we should take into consideration the future impact of institutional investment. It may seem unlikely that an asset that has ups and downs as stomach-churning as bitcoin's could ever be a widely used store of value, let alone a viable everyday currency, but large amounts of investment from big institutions will have a stabilizing effect on the price.

Bitcoin is such a nascent technology, with so much space to expand and change, that it's impossible to predict where it will be in five or ten years from now, let alone the end of the century or the year 2140. What looks likely, though, is that as ever more coins are mined and mainstream acceptance increases, it will become more stable and easier to utilize.