If you spent $27 on Bitcoin when Satoshi Nakamoto created it in 2009 your investment would be worth over $37,000,000.
Considered to be the greatest investment vehicle of all time, Bitcoin has seen a meteoric rise throughout 2017 going from $777 to $17,000.
Making millionaires out of opportunistic investors and leaving financial institutions speechless, Bitcoin has answered its critics at every milestone this year and some believe this is just the beginning.
The December 10th launch of Bitcoin futures, which will allow investors to access the Bitcoin market through a major US regulated exchange, means we’re just getting started.
What makes Bitcoin so valuable is that there is a limited amount. There will be a maximum of 21 million Bitcoins and unlike regular fiat currency, you cannot print more of them at will. This is because Bitcoin runs a working protocol: to generate it, you need to mine using the processing power of computers to solve the complex algorithms of 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, which means the only viable way for most people to get Bitcoin is to buy it on an exchange. At today’s price levels, is it worth taking that risk?
Many believe that Bitcoin is just a bubble. I spoke with long-term investor and cryptocurrency expert Duke Randal, who believes the asset is overvalued, “I would compare it to many supply and demand bubbles throughout history, such as Dutch Tulip Mania and the dot com bubble of the late 90s. Prices are purely speculative. Based on, and When you look at the functionality of Bitcoin as an actual currency, it’s almost embarrassing.” For those who don’t know, the dot com bubble was a period from 1997-2001 where many Internet companies were created and given wildly optimistic valuations based on pure speculation, then dropped 80-90% as the bubble started to collapse. the 2000s Some companies, such as eBay and Amazon, recovered and are now above those valuations, but for others it was the end of the line.
Bitcoin was originally created to take power away from our financial systems and put people in control of their money by cutting out the middle man and enabling peer-to-peer transactions. However, it is currently one of the slowest cryptocurrencies on the market, with 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, with an average block time of two minutes, a fifth of what Bitcoin can do, and that’s without anonymity. The world’s second largest cryptocurrency, Ethereum, already has a higher transaction volume than Bitcoin, despite the fact that each Ether costs only $676, compared to Bitcoin’s $16,726.
So why is the value of Bitcoin so high? I asked Duke Randal the same question. “It all boils down to the same economics of supply and demand, there’s not a lot of Bitcoin available and its recent price increase has attracted a lot of media attention, along with the launch of Bitcoin futures which many see as the first sign. Bitcoin’s mass market is accepting it, a lot of people are on board. is the pursuit of monetary gain. Like any asset, when there is more demand to buy than to sell, the price rises. This is a bad thing. New investors entering the market without understanding the principles behind blockchain and these currencies are likely to burn out.”
Another reason is that Bitcoin is very volatile, it has been known to go up or down by thousands of dollars in less than a minute, and if you are not used to it and don’t expect it, it tends to panic less experienced investors, resulting in a loss. This is another reason why Bitcoin will struggle to gain acceptance as a form of payment. The price of Bitcoin can move significantly as sellers accept Bitcoin from customers and sell it on local currency exchanges. This erratic movement can wipe out their entire profitability. Will this instability disappear soon? Not likely: Bitcoin is a relatively new asset class and while awareness is growing, only a very small percentage of the world’s population owns Bitcoin. Until it distributes more and its liquidity improves significantly, volatility will continue.
So if Bitcoin is pretty useless as an actual currency, what are its applications? Many believe that Bitcoin has gone from being a viable form of payment to a store of value. Bitcoin is like “digital gold” and will be used as a benchmark for other cryptocurrencies and blockchain projects to measure and exchange. Recently, there have been stories of people in hyperinflationary countries such as Zimbabwe buying Bitcoin to hold on to their wealth, rather than watch its value decline under the carelessness of its central banking system.
Is it too late to get involved in Bitcoin? If you believe in what these cryptocurrencies will do for the world, it’s never too late to get involved, but with the cost of Bitcoin so high, it’s a boat ride for some who have already set sail. You’d be better off looking at Litecoin, which is up 6908% year-to-date, or Ethereum, which is up a whopping 7521% year-to-date. These new and faster currencies hope to achieve what Bitcoin did at its inception in 2009, and replace government fiat currencies.
Who knows what the price of these currencies will be ten, fifteen or even twenty years from now? One thing’s for sure though, we better brace ourselves because it’s going to be a wild ride.