Had you spent $27 on Bitcoin when it was created by Satoshi Nakamoto in 2009 your investment would now be worth over $37,000,000?
Widely regarded as the maximum investment vehicle ever, Bitcoin has seen a meteoric rise during 2017 going from $777 all how you can $17,000.
Creating millionaires out of opportunistic investors and leaving financial institutions open-mouthed, Bitcoin has answered its critics at every milestone this year and some believe this really is just the beginning.
The launch of Bitcoin futures on December 10th, which for the first time enables investors to enter the Bitcoin market through a major regulated US exchange, implies that individuals are simply getting started.
Why is Bitcoin so valuable is that there’s a finite amount in existence. There will only ever be no more than 21 million Bitcoins and unlike normal fiat currencies, you can’t just print more of them when you feel like. This is because Bitcoin runs on a proof of work protocol: in order to create it, you’ve to mine it using computer processing power to fix complex algorithms on the Bitcoin blockchain. Once this really is achieved, you’re rewarded with Bitcoin as payment for the “work” you’ve done. Unfortunately, the reward you obtain for mining has decreased drastically almost annually since Bitcoin’s inception, meaning that for most people the only real viable way to have Bitcoin is buying it on an exchange. At the current price levels is that the risk worth taking?
Many believe Bitcoin is merely a bubble. I spoke to cryptocurrency expert and long term investor Duke Randal who thinks the asset is overvalued, “I’d compare this to numerous supply and demand bubbles over histories such as Dutch Tulip Mania and the dot com bubble of the late 90s. Prices are purely speculation based, and when you look at Bitcoin’s functionality being an actual currency it is practically embarrassing bitcoin mixer.” For people who don’t know, the dot com bubble was an interval between 1997-2001 where many internet companies were founded and given outrageously optimistic valuations based purely on speculation that later plummeted 80-90% whilst the bubble started initially to collapse in early 2000s. Some companies such as eBay and Amazon recovered and now sit far above those valuations but also for others, it was the end of the line.
Bitcoin was originally created in order to take power far from our financial systems and put people in control of their very own money, eliminating the middle man and enabling peer to peer transactions. However, it is now one of the slowest cryptocurrencies in the marketplace, its transaction speed is four times slower than the fifth biggest cryptocurrency and its nearest competitor for payment solutions Litecoin. Untraceable privacy coin Monero makes transactions even quicker, boasting the average block time of just two minutes, a fifth of that time period Bitcoin can get it done in, and that’s without anonymity. The world’s second biggest cryptocurrency, Ethereum, already has a higher transaction volume than Bitcoin despite being valued at only $676 dollars per Ether in comparison to Bitcoin’s $16,726 per Bitcoin.
So how come Bitcoin’s value so high? I asked Duke Randal the same question. “All of it goes back to the same supply and demand economics, relatively there’s not very much Bitcoin available and its recent surge in price has attracted a lot of media attention, this combined with launch of Bitcoin futures which many see as the very first sign Bitcoin has been accepted by the mass market, has led to a lot of people jumping on the bandwagon for financial gain. Like any asset, if you find a greater demand to get than to market, the cost goes up. This is bad since these new investors are entering the marketplace without understanding blockchain and the underlying principles of those currencies meaning they are likely to get burnt “.
Another reason is that Bitcoin is very volatile, it’s been proven to swing up or down thousands of dollars in under a minute which if you should be not used to nor expecting it, causes less experienced investors to panic sell, resulting in a loss. This is another reason Bitcoin will struggle to be adopted as a form of payment. The Bitcoin price can move substantially between enough time vendors accept Bitcoin from customers and sell it to exchanges due to their local currency. This erratic movement can wipe out their entire profitability. Will this instability go away anytime soon? Improbable: Bitcoin is really a relatively new asset class and although awareness is increasing, only a really small percentage of the world’s population hold Bitcoin. Until it becomes more widely distributed and its liquidity improves significantly, the volatility will continue.
So if Bitcoin is pretty useless being an actual currency, what are its applications? Many believe Bitcoin has moved on from being a feasible kind of payment to being a store of value. Bitcoin is much like “digital gold” and will simply be used as a benchmark for other cryptocurrencies and blockchain projects to be measured against and traded for. Recently there were stories of individuals in high inflation countries such as Zimbabwe buying Bitcoin in order to retain what wealth they have as opposed to see its value decline under the recklessness of its central banking system.
Can it be too late to try Bitcoin? In the event that you rely on what these cryptocurrencies will do for the entire world then it is never too late to have involved, but with the expense of Bitcoin being so high can it be a boat for a few that has already sailed. You may be better off having a look at Litecoin, up 6908% for the season or Ethereum which can be up an unbelievable 7521% for the year. These newer, faster currencies hope to accomplish what Bitcoin first set out to do in its inception in 2009 and replace government-run fiat currencies.
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