Tom Lee of FundStrat: Bitcoin’s Recent Pullback Can Be Easily Explained

Tom Lee has made no secret of his bullishness for Bitcoin. Back in October, which admittedly seems like forever ago in the crypto space, he explained to Business Insider a technique which his company had been using to predict price changes over time. Based on Metcalfe’s law, Lee claims that he can use his equation to explain 94% of the price movement in Bitcoin:

If you build a very simple model valuing bitcoin as the square function number of users times the average transaction value. 94% of the bitcoin moves over the past four years is explained by that equation.

Metcalfe’s law was originally penned to account for the value of a telecommunications network. It states that the value of a network is proportional to its number of users squared. The theory is that a network gains value exponentially in accordance with new participants. Imagine a telephone. It’s not very useful on its own. However, add a second to the network and suddenly it’s no longer a pointless piece of hardware. Add a third network participant and the combination of interactions grows by more than double. Naturally, this increases the value of the network.

According to Lee, the same can be said about Bitcoin. This is because it’s essentially a communication network itself. However, the only information communicable is value. Fundstrat analysed the number of new wallet addresses as a rough estimate of Bitcoin users. Over time, they found that the square of the figure explained some 63% of price shifts in the period 2013-17. This was taken further by including a second variable – the transaction volume per user. By using the second value with the existing equation, they found that they could explain an additional 20% of swings. Finally, Lee and company were able to find a formula by “regressing the price of Bitcoin against both unique addresses squared and transaction volume per user.” This particular formula explained a massive 94% of the variation in the price of cryptos in the period they studied.

But, what does all this mean and why is it relevant right now? Well, according to Lee, Bitcoin’s price is currently over-extended in relation to his calculations. This helps to explain why we’re seeing a pullback today. For him there isn’t a lot of room to grow whilst the network remains at it current size. For the next boom, we’ll need to see another huge influx of users. This will provide the required value to the network and thus necessitate a higher price point. This is something that Lee and Fundstrat are confident in:

Bitcoin’s longer-term technical trend remains positive but short-term upside appears limited and the risk of a correction is growing.

For those interested, you can listen to Lee’s analysis on Business Insider’s “the bit” here. He explains his theory in greater detail as well as reaffirms his bullish outlook for the longer term.

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Longtime Bitcoin bull and Wall Street strategist, Tom Lee, has stated that he believes the lone option for institutional investors wishing to get exposure to crypto by traditional means is hugely undervalued. For him, The Bitcoin Investment Trust (GBTC) could raise some two and a half times from its current price of $679 to an impressive $2,540. This makes it an “attractive” buy.

In a report from Wednesday in which Lee laid out his views on Bitcoin for clients, he claimed his call was based on the fact that many fellow investors had underestimated the value of Bitcoin Gold and Bitcoin Cash. He wrote:

The bitcoin investment trust, GBTC, is essentially the only ‘game in town’ if a U.S.-based investor wants to gain exposure to bitcoin via an exchange-listed instrument (there are ETNs in Europe as well),” Lee wrote Wednesday. “Investors have underestimated [net asset value] because they overlook the $31 worth of bitcoin cash (BCH) and $22 worth of bitcoin gold (BTG) held by GBTC.

The Bitcoin Investment Trust was launched in 2013 and remains the only such institution for investors to get exposure to crypto. This obviously excludes the way us non-institutional investors go about getting our exposure – simply buying Bitcoin. It does, however,  represent the fifth largest holding of ARK Invest’s Innovation ETF. The investment fund specializes in disruptive technology companies like Tesla and Twitter and Lee’s optimism for the trust could inspire other, previously wary, traders to enter the cryptocurrency space.

Whilst Lee’s statements make a nice change from the usual doom and gloom Bitcoiners regularly face from Wall Street, they should come as little surprise to those familiar with the strategist. He’s been refreshingly bullish on Bitcoin before, and has predicted a $25,000 Bitcoin by 2022. Lee, who is also the co-founder of Funstrat, a market sector research group, appeared on Yahoo! Finance All Markets Summit earlier Wednesday. There, his optimism for cryptocurrency was obvious. He claimed them to be a “very important technology” and celebrated finance’s discovery of a “proper structure for maintaining encryption in security” concluding that “Bitcoin… is an important security for investors to own.”

Now is a good time as any to make a bold Bitcoin price prediction. Tom Lee, one of Wall Street’s top strategists, did exactly that. In his opinion, Bitcoin will outshine gold in the next five years. Moreover, Lee sees the Bitcoin value surpass the US$20,000 mark with relative ease. It is even possible one BTC will be worth US$55,000 by 2022. Very interesting statements, to say the least.

It is evident Wall Street experts have no love lost for Bitcoin and cryptocurrency. According to some people, cryptocurrency is clearly in a bubble. It is certainly possible there is some merit to such statements. Then again, free markets can’t be predicted in an accurate manner. Strategist Tom Lee feels things are looking a lot better than others predict. In his opinion, Bitcoin will eventually cannibalize gold altogether. That would be a rather remarkable turn of events, to say the least.

Tom Lee Makes a Bold Bitcoin Price Prediction

In his opinion, Bitcoin will be worth as much as US$55,000 by 2022. Such a high number may seem ludicrous at first, but it is not entirely impossible to reach either. With investors showing less demand for gold and more interesting in cryptocurrency, such a shift can take place sooner rather than later. Even reaching the “minimum” of US$20,000 per BTC would be rather incredible. After all, that puts the total Bitcoin market cap at around US$332bn. To put this into perspective that would be an 800% market cap increase over the next five years.

It is worth mentioning Lee is quite bearish on stocks right now. That in itself is very remarkable where Wall Street is concerned. Most traders still scalp stocks for minuscule profits whenever they can. However, opportunities are harder to come by and returns are a lot lower compared to a few years ago. It is evident Bitcoin makes a lot more sense in this regard. Supply and demand can push the BTC value to new heights over time, that much is evident.

Moreover, the influx of “new coins” in Bitcoin will slow down by 2020. Gold, on the other hand, is being mined at an accelerated pace right now. High demand for a limited product should have a positive effect on the price. Only time will tell if Lee’s prediction is accurate, though. We have seen some wild price predictions over the years, which never even got close to hitting their mark. This one may be a bit too optimistic, for the time being. Then again, there is no reason to deny the possibility of Bitcoin hitting US$20,000 either.