It's a phenomenon familiar to anyone who follows the cryptocurrency industry. A prominent figure—perhaps the CEO of a digital currency exchange, a key developer or researcher or a successful cryptocurrency investor—makes a dramatic prediction about the price of bitcoin or another token or the general movement of the digital currency sphere. Many of these predictions call for major shifts away from the current climate ("Bitcoin will hit $100,000!" or, perhaps, "Bitcoin will collapse entirely!").
As is usually the case in the financial world, sometimes these predictions come to pass, but more often than not they don't. Nonetheless, many experts in the field (as well as those who call themselves as experts) continue to make price predictions for bitcoin and other digital currencies, and investors still seem to take heed. Below, we'll explore why any cryptocurrency investor should take a price prediction with a good degree of skepticism.
Where's the Analysis?
One of the major problems with many price predictions about bitcoin is that they lack sufficient analytical support to back up their claims. An outlandish price point, particularly one in the upward direction, is always going to be tempting to investors; someone holding a cryptocurrency priced at $0.01 per token can easily be swayed to believe that the token will skyrocket to $10,000 simply because he or she wants it to be true. The issue, though, is that many predictions come without evidence and analysis to act as support.
Macroeconomist Peter Tchir believes that bitcoin price forecasts in particular are overhyped. Tchir suggested in a recent profile in Forbes that some prominent figures in the industry who push for sky-high prices are doing so for reasons that may not be linked to fundamentals. When a CEO of a popular exchange calls for a bitcoin price many times what it is today, Tchir suggests, it could be that the CEO is pushing his own "strong incentives to see crypto thrive." In other cases, the forecast may come from an analyst with a "permabull" stance. Indeed, Tchir investigated one such forecaster and found no instances of a bearish prediction on record for that individual.
These forecasters may be right in their predictions. It's true that there are a significant number of cryptocurrency millionaires out there who made significant money off of early investments in the space. Tchir suggests, though, that forecasters with a permanent bull position or a personal incentive to see prices rise to the stratosphere should not be presented by media as "news." He says, "there are a lot of rules surrounding announcements and prognostications from CEO's, and even pundits, in the security markets. Shouldn't we be doing a better job on crypto?"
Difficulties in the Space
Taking a step away from issues with forecasters themselves, a cryptocurrency investor should always keep in mind that the space itself is inherently challenging to analyze. Even developers of some of the top digital currencies in the world have a difficult time keeping tabs on all of the latest coins, tokens, companies and developments. And assuming that one person could manage to successfully filter out the useful information in an ever-growing pipeline related to the digital currency space, the fact that the industry is so young and largely untested means that there is little by way of prior proven models, theories and strategies in place to help assess where things have been and where they're going. Even when a price prediction makes use of analysis in a sophisticated and appropriate way, there are always going to be many factors that the cryptocurrency community simply does not know about yet. This can of course be said for investing in general, but it is arguably even more of a concern in the nascent digital currency space.
All of this is to say that investors in virtual currencies should keep a healthy dose of skepticism when news of the latest price prediction becomes available.
Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and ripple.