If you had spent $27 on Bitcoin when Satoshi Nakamoto created it in 2009, your investment would now be worth more than $37,000,000.
Widely regarded as the greatest investment vehicle of all time, Bitcoin saw a meteoric rise during 2017, rising from $777 to $17,000.
By 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 is just the beginning.
The launch of Bitcoin futures on December 10, which for the first time will allow investors to enter the Bitcoin market through a major US regulated exchange, means that we are just getting started.
What makes Bitcoin so valuable is that there is a finite amount of it. There will only be a maximum of 21 million Bitcoins, and unlike normal fiat currencies, you can’t print more whenever you want. This is because Bitcoin runs on a proof-of-work protocol: to create it, you have to mine it by using the processing power of the computer to solve complex algorithms on the Bitcoin blockchain. Once this is accomplished, you are rewarded with Bitcoin as payment for the “work” you have done. Unfortunately, the reward you get for mining has drastically decreased almost every year since the inception of Bitcoin, which means that for most people, the only viable way to obtain Bitcoin is to buy it on an exchange. At current price levels, is it worth taking that risk?
Many believe that Bitcoin is simply a bubble. I spoke to cryptocurrency expert and long-term investor Duke Randal, who believes the asset is overvalued: “I would compare this to many supply and demand bubbles throughout history, like the Dutch Tulip Mania and the dotcom bubble. from the late 90s. The prices are purely speculation based, and when you look at the functionality of Bitcoin as a real currency, it’s almost embarrassing.” For those who don’t know, the dotcom bubble was a period between 1997 and 2001 when many internet companies were founded and given outrageously optimistic valuations based solely on speculation that then crashed by 80-90% when the The bubble started to collapse in the early 2000s. Some companies, like eBay and Amazon, bounced back and are now well above those valuations, but for others it was the end of the road.
Bitcoin was originally created to take power away from our financial systems and put people in control of their own money by 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 is four times slower than the fifth largest cryptocurrency and its closest competitor in payment solutions, Litecoin. Untraceable privacy coin Monero makes transactions even faster, with an average block time of just two minutes, a fifth of the time Bitcoin can do it, and that’s 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 per Bitcoin.
So why is the value of Bitcoin so high? I asked Duke Randal the same question. “It all goes back to the same supply and demand economics, there is relatively not much Bitcoin available and its recent rise in price has attracted a lot of media attention, this combined with the launch of Bitcoin futures which many see as the first sign .Bitcoin is being accepted by the mass market, it has resulted in a lot of people jumping on the bandwagon looking for financial gains. Like any asset, when there is a higher 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 coins, which means they are likely to get burned.”
Another reason is that Bitcoin is extremely volatile, it has been known to go up or down thousands of dollars in less than a minute, which if you are not used to it or expect it, makes less experienced investors panic and sell, resulting at a loss. This is yet another reason why Bitcoin will have a hard time being adopted as a form of payment. The price of Bitcoin can vary substantially between the time providers accept Bitcoin from customers and sell it on exchanges for their local currency. This erratic movement can wipe out all your profitability. Will this instability go away soon? Not likely: Bitcoin is a relatively new asset class, and although awareness is increasing, only a very small percentage of the world’s population owns Bitcoin. Until it is distributed more widely and its liquidity improves significantly, the volatility will continue.
So if Bitcoin is pretty useless as a real currency, what are its applications? Many believe that Bitcoin has gone from being a viable form of payment to becoming a store of value. Bitcoin is like “digital gold” and will simply be used as a benchmark for other cryptocurrencies and blockchain projects to measure and trade them. Recently, there have been stories of people in high-inflation countries like Zimbabwe buying Bitcoin to preserve the wealth they have rather than see its value decline due to the recklessness of their 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 since the cost of Bitcoin is so high, it’s a ship for some that has already sailed. You better take a look at Litecoin which is up 6908% on the year or Ethereum which is up an incredible 7521% on the year. These newer, faster coins hope to accomplish what Bitcoin first set out to do at its inception in 2009 and replace government-run fiat currencies.
Who knows what the price of these coins will be in ten, fifteen or even twenty years? One thing is for sure though, we better buckle up as this is going to be one wild ride.