Bitcoin: All That Wants to Develop?

If you had spent $27 on Bitcoin when it was created by Satoshi Nakamoto in 2009, your investment would now be worth more than $37,000,000.

Widely regarded as the greatest investment vehicle of all time, Bitcoin experienced a meteoric rise during 2017 from $777 all the way to $17,000.

Making millionaires out of opportunistic investors and leaving financial institutions speechless, Bitcoin has answered its critics at every turn this year, and some believe this is just the beginning.

The launch of Bitcoin futures on December 10, which will allow investors to enter the Bitcoin market through a major regulated US exchange for the first time, implies that we are just getting started.

What makes Bitcoin so valuable is that there is a limited supply. There will be a maximum of 21 million Bitcoins and unlike normal fiat currencies, you can’t just print more of them whenever you want. That’s because Bitcoin runs on a proof-of-work protocol: to create it, you have to mine it using computer processing power to solve the complex algorithms on the Bitcoin blockchain. Once this is achieved, you will be rewarded with Bitcoin as payment for the “work” you have done. Unfortunately, the reward you get for mining has been drastically reduced almost every year since Bitcoin’s inception, meaning that for most people, the only viable way to get Bitcoin is to buy it on an exchange. At current price levels is this a risk worth taking?

Many believe that Bitcoin is simply a bubble. I spoke with crypto expert and long-term investor Duke Randall who believes the asset is overvalued: “I would compare it to many supply and demand bubbles throughout history such as the Dutch Tulip Mania and the dot com bubble of the late 90s. Prices are pure speculation based , and when you look at Bitcoin’s functionality as an actual currency, it’s almost embarrassing.” For those who don’t know, the dot com bubble was the period between 1997-2001. when many Internet companies were founded and given outrageously optimistic valuations based solely on speculation that later fell by 80-90% when the bubble started to collapse in the early 2000s. Some companies like eBay and Amazon have recovered and are now well above those estimates, but for others it was the end of the streak.

Bitcoin was originally created to take power away from our financial systems and put people in control of their own money, cutting out the middleman and enabling peer to peer transactions. However, it is now one of the slowest cryptocurrencies on the market, its transaction speed four times slower than the fifth largest cryptocurrency and its closest competitor for payment solutions Litecoin. The untraceable privacy coin Monero makes transactions even faster, boasting an average block time of just two minutes, a fifth of the time Bitcoin can do it, and without anonymity. The world’s second largest cryptocurrency, Ethereum, already has a higher transaction volume than Bitcoin despite being valued at just $676 per Ether compared to Bitcoin’s $16,726.

So why is the value of Bitcoin so high? I asked Duke Randal the same question. “It all comes back to the same economics of supply and demand, relatively little bitcoin available, and its recent rise in price has attracted a lot of media attention, combined with the launch of Bitcoin futures which many see as the first sign of bitcoin being accepted by the mass market, resulting in many people are investing for financial gain. As with any asset, when there is more demand to buy than to sell, the price goes up. This is bad because these new investors are entering the market without understanding blockchain and the underlying principles of these currencies, which means they will probably burn.”

Another reason is that Bitcoin is extremely volatile, it has been known to swing up or down thousands of dollars in less than a minute, which, if you are not used to it or expect it, causes less experienced investors to panic sell, resulting in a loss. This is another reason why Bitcoin will be difficult to accept as a form of payment. The price of Bitcoin can fluctuate significantly between the time sellers accept Bitcoin from buyers and sell it on an exchange for their local currency. This unpredictable movement can destroy their entire profitability. Will this instability disappear soon? Not likely: Bitcoin is a relatively new asset class and although awareness is growing, only a very small percentage of the world’s population holds Bitcoin. Until it becomes more widespread and its liquidity improves significantly, volatility will continue.

So if Bitcoin is pretty much useless as an actual currency, what are its uses? Many believe Bitcoin has transitioned from a viable form of payment to a store of value. Bitcoin is like “digital gold” and will simply be used as a benchmark for other cryptocurrencies and blockchain projects to be measured against and traded against. There have recently been stories of people in highly inflationary countries such as Zimbabwe buying Bitcoin to hold on to what wealth they have rather than see its value decline under the recklessness of the central banking system.

Is it too late to get involved in Bitcoin? If you believe in what these cryptocurrencies will do for the world, then it’s never too late to get involved, but with the price of Bitcoin so high, for some it’s a ship that has already sailed. You might be better off looking at Litecoin, which is up 6908% for the year or Ethereum which is up a whopping 7521% for the year. These newer, faster currencies hope to achieve what Bitcoin first set out to do back in 2009 and replace government fiat currencies.

Who knows what the price of these currencies will be in ten, fifteen or even twenty years? One thing is for sure though, we better buckle up because it’s going to be a wild ride.