Exciting. Volatile. Revolutionary. A year in Bitcoin
Exciting. Volatile. Revolutionary. These are all words that can be used to describe the past 12 months in the life of Bitcoin, the best known of the cryptocurrencies. This was the year that Bitcoin really made its debut on the global stage.
During that time, it quickly became as familiar to Mr, Mrs and Ms Jo Public as it already was to those who had followed it since its nebulous beginnings and its early tentative life as a potential alternative to established fiat currencies.
As noted here previously, Bitcoin has its ultimate origin in a paper published in on 31 October 2008 under the name Satoshi Nakamoto: Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin launched as the world’s first decentralised currency in January 2009.
Wild BTC price fluctuations
Bitcoin has fluctuated wildly since launch. According to a recent piece of economic research by the Federal Reserve Board of San Francisco (FRBSF) after its launch, the dollar price of a Bitcoin remained under $1,150 until 22 February 2017, when it began increasing exponentially for about 10 months.
Bitcoin was valued at $2.413.63 on 29 May 2017 according to Coindesk.com. It hit $3,000 in June 2017. In a single week in December 2017 it almost doubled in value. It touched an all-time peak of around $19,768 according to CryptoCoin.News on 17 December. Coindesk.com records the peak as $19,343.04 while eToro logged it as over $20,000.
This was the same day that Bitcoin futures trading started on the Chicago Mercantile Exchange (CME), giving investors the ability to sell it short. Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak and Patrick Shultz draw attention to this in a recent piece of economic research published under the auspices of the Federal Reserve Board of San Francisco (FRBSF).
Transactional demand versus speculative demand
They make a clear distinction between transactional demand and speculative demand. Transactional demand is the use of Bitcoin in the purchases of goods and services. Speculative demand is in effect a bet on the price of the underlying asset or currency increasing.
For most currencies and assets, investors have ways to bet on the increase or decline in their value using a variety of financial instruments based on the asset or a currency, so-called financial derivatives.
Before 17 December 2017, there was no market for Bitcoin derivatives. Betting on the increase in Bitcoin price was easy – one just had to buy it. Speculative demand for Bitcoin came only from optimists, investors who were willing to bet money that the price was going to go up.
Futures enabling pessimists
The introduction of Bitcoin futures enabled pessimists to bet on a price fall, buying and selling contracts with a lower delivery price in the future than the spot price.
The fact that Bitcoin more or less doubled in value in such a short space of time was nothing new. Mati Greenspan, senior market analyst at social trading platform eToro, notes that much earlier in its life it shot up from six cents to around 40 cents in the span of a month (October 4-November 7 2010). What was different in December 2017 was the speed and scale of the upvaluation.
A number of reasons can be cited for the surges in popularity enjoyed by Bitcoin. Bitcoin was designed in the wake of the global financial crisis that started to brew in the summer of 2007 and in the autumn of 2008 began to undermine confidence in traditional economic models around the world.
Even the ultra-sceptical will have to acknowledge that a few of those doubts might have solid groundings. But it could be difficult to follow the argument that Bitcoin represents a viable alternative to an established major fiat currency.
It is much easier to argue that governments elsewhere have a natural ability for monetary debauchery. The names of countries such as Argentina, Venezuela and Zimbabwe trip readily off the tongue in this context. An alternative to their fiat funds has more force.
Rollercoaster moves in perspective
In December 2017 Mati Greenspan put the rollercoaster moves firmly in perspective, saying: “We are witnessing an extreme surge in demand, with thousands and thousands of incoming clients who want to trade it, far more than we ever imagined.
“We are redirecting our energies from marketing and towards know your client administration just so that we can handle them,” he said. “We have investors in Zimbabwe who would be willing $30,000 for one Bitcoin, if only they could get their money out of the country.”
Updating his comments this week, he explained that if such investors could access eToro’s platform, they would pay the same price as other clients. But it can be difficult for them (and investors in other African countries) to do so for a combination of technical and regulatory reasons.
He further adds that Golix, an exchange that caters specifically for clients in Zimbabwe, charges prices that are typically 20%-50% higher than eToro.
On the other side of the Bitcoin, its harshest critics, including the likes of JP Morgan CEO Jamie Dimon, legendary traditional investor Warren Buffett, the Sage of Omaha, and multi-billionaire philanthropist Bill Gates, can be seen as (a) living in ivory towers and (b) talking their own book as they have a vested interest in traditional currencies continuing to act as a store of value.
They are not alone in expressing doubts. “If Bitcoin isn’t a bubble, it’s a spookily good impression,” said Andrew Williams, investment specialist, equity, at Schroders, on 20 October last year, when the maximum price paid was around $5,800.
Is Bitcoin a genuine alternative?
For concerned investors who have been rattled by the startling discovery that the money in which their savings have traditionally been placed is failing one of the classic functions of money – to act as a store of value – Bitcoin represents a genuine alternative. Of sorts.
Corrections, often major and abrupt corrections, will remain a fact of life for Bitcoin and other cryptocurrencies. The next important step in the direction of universal respectability for Bitcoin will be to achieve stability, suggests one market practitioner. But this in itself could prove problematic.
In a classic Catch-22 situation, the more stable its valuation becomes, the more likely that demand might increase, pushing up its value again as traders attracted by a snowball effect propelled by headline news pile in.
Prepare for more surprises
Crypto-consultant Andrew Woodcock says we ought to be prepared for more surprises ahead, and not always good ones. “The price could tank as well as rise,” he said. “I wouldn’t care to predict what might happen in the weeks and months ahead, but over five years, I see Bitcoin at multiples of today.”
In the context of Bitcoin’s astonishing journey to date, stability and certainty could be said to have equal and opposite reactions. This continuing uncertainty lies behind the glibness of the prediction made by Mati Greenspan when asked to predict what will happen to it for the rest of this year and beyond.
“A Bitcoin will be worth a thousand dollars or a million dollars,” he offers. At the time of writing (3 June 2018), according to Coindesk.com the figure is $7,701.33.
A year in Bitcoin
- 5 August: $3,000
- 14 August: $4,000
- 2 September: $5,000
- 6 September: UK underwear maker Michelle Mone to sell luxury Dubai apartments priced in Bitcoin
- 12 September: UK FCA issues warning to consumers; JP Morgan CEO Jamie Dimon says Bitcoin is a fraud
- 26 November: $9,000
- 29 November: $11,000 (passed through $10k and $11k on the same day, hitting $11,377 before falling back 20%)
- 6 December: $13,000
- 7 December: $16,000
- 10 December CBOE Global Markets launches Bitcoin futures
- 15 December UK Financial Conduct Authority issues feedback statement on distributed ledger technology
- 17 December: Bitcoin passes the $20,000 mark, before falling back around 17-18 percent; CME launches Bitcoin futures
- 22 December: Bitcoin falls back to under $14,000
- 2018 Bitcoin volatility continues, with its value around $8,319 in mid-May.
- Beyond 2018: Bitcoin will be worth between one thousand dollars and one million dollars, quips Mati Greenspan.