Bloomberg column: If the historical law repeats itself, the BTC will rise to a maximum of $400,000.

The cryptocurrency market has been in the process of switching between bulls and bears and has gone through two cycles. Bitcoin rose from near zero in 2009 to nearly $150 in 2013, and then rebounded to $1,150 after falling 60%. By 2015, Bitcoin fell 85% to $175 (although still higher than the 2013 high) and then surged to a peak of about $20,000 by the end of 2017. In 2018, it plunged 85% again to $3,200 (but still above the 2015 high). Bitcoin has rebounded sharply this year and is now hovering around $8,100. Can Bitcoin replay the laws of the past? If the last two cycles are repeated, Bitcoin could rise to $60,000 to $400,000 and then fall again by 85%.

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However, in fact, today's encryption market is very different from 2013 and 2015. On the one hand, the current encryption market is much larger, with a market capitalization of $260 billion, compared to $1 billion and $3 billion in 2013 and 2015, respectively. The types of cryptographic assets and the number of users in the market are far more than in the past. In 2018, the development of platforms and code bases cost more than $30 billion in investment. Regulation is becoming more clear, and large companies including JP Morgan Chase and Facebook are actively entering the market.

Of course, this does not eliminate the possibility of bubbles and crashes. Even gold or residential real estate has experienced many bubbles. Due to the rapid innovation of cryptocurrency, radical thinking and strong subversiveness, investors must have psychological expectations for a large number of market fluctuations. However, is it possible for investors to reduce market volatility while achieving high returns?

First we can focus on the bitcoin options market. In late November 2017, the cryptocurrency price was very close to the current ($8,000), and there was even a one-month $10,000 bitcoin call option on the market. This means that when Bitcoin is priced at $8,000, investors pay $2,200 to buy the option to get Bitcoin at $10,000. At this time, Bitcoin must reach $12,200, which means that a month's increase of more than 50%, the purchaser of the option can balance the profit and loss. Investors believe that Bitcoin will have a 25% chance of breaking through $10,000 in December. If it breaks, the price is expected to be nearly $19,000. If not, its expected price is only around $4,000. From this we find that the implied volatility of this option is as high as 300%.

In contrast, the current contract of about 85% implied volatility is only $200. The probability that Bitcoin will exceed $10,000 in a month is 15%. If it is exceeded, the expected price is only slightly above $11,000. If not, the expected price is about $7,500. This is a very volatile investment, but it is far less than 2017. Therefore, the possibility of a recent bubble or crash seems to be less than the previous one .

Another clue is the relevance of the S&P 500 index. The cryptocurrency is a technology business, and technology companies are often highly correlated with the S&P 500 index. They perform well when the economy is in good shape, because demand growth is strong, the economy supports innovation and the capital is low. But they are also a substitute for traditional finance. When populism threatened to wage war, when militarists threatened to wage war, or when progressives talk about increased spending, wealth taxes, and financial regulation, they performed well.

The table below shows the average and standard deviation of the three-month return for Bitcoin, grouped by the correlation with the Standard & Poor's 500 Index for the previous three months. These are quarterly returns, not annualized returns. We can see that when the correlation of a quarter is close to zero, the average return rate of Bitcoin is very high in the next quarter, but the volatility is also higher . These are the peaks of the bubble and the ruptured quarter.

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On the other hand, when bitcoin is affected by fundamentals (whether positive or negative), the average rate of return is low, even negative, but the standard deviation is small (less volatility).

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Currently, the correlation between Bitcoin and the Standard & Poor's 500 Index is close to -0.2. Since the mid-2018s, this indicator has approached zero only in the early months of 2019 . But during the bubble and crash at the end of 2017, the correlation was close to zero from September 2017 to January 2018. In general, Bitcoin seems to be alternately positively and negatively correlated with the S&P 500 index, but occasionally close to zero; while the near zero period seems to have a rapid price increase, presumably because bitcoin prices are not reflected Fundamental .

From this point of view, the next cycle may really be different, perhaps the industry is more mature, perhaps investors are smarter. However, I hope that the price of Bitcoin will follow the fundamentals this summer, instead of chasing FOMO (fear of missing).