Is Bitcoin a Bubble Waiting to Burst?

Is Bitcoin a Bubble Waiting to Burst?

Read the 2nd Blog Article of our Series CryptoCurrency Uncovered where we focus on the performance of Bitcoin. If you haven't  read our first Blog article The Nuts and Bolts of CryptoCurrency - you can access it here

As with all cryptocurrencies, Bitcoin is subject to market fluctuations; where lies potential for large gains but also significant losses. Just a few years ago, the only people interested in Bitcoin were Computer Scientists. If you tried to talk to anyone else about cryptocurrencies they would surely have had a very confused look on their faces. In recent months, the growth of Bitcoin, not only its market value growth, but also its popularity and general understanding by the wider community has been phenomenal.

It is often said that those who invested early are millionaires today, so many people are asking whether Bitcoin can continue to deliver large returns on investments, together with wondering whether Bitcoin will ever make the status of a 'common' currency?

You take the ups with the downs

To try and address some of these questions, let's roll back the clocks a little. Bitcoin began to awaken around October and November 2013. At that time, it was trading somewhere between US$100 in early October 2013 to US$195 by the end of that month. In November 2013, the price shot through the roof from around US$200 to over US$1,120 in just four weeks. This massive growth is largely attributed to new Bitcoin exchanges and miners in China entering the marketplace. This is also when the Mt. Gox exchange was operating, and was involved in around 70% of all Bitcoin transactions.

But like the calm before the storm, these huge spikes in values started to become more volatile. Rumours were rife surrounding a lack of security and poor management through Mt. Gox which in turn forced the market to become nervous. People had problems withdrawing their money from the exchange and the price fell to around $750 by December 7, 2013; a drop of around 39% over just a few days. In December 2013, according to Paul Krugman's blog for the New York Times, Charlie Stross states 'Bitcoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions.' The high-profile arrests that followed in January 2014 of Charlie Shrem, Chief Executive of New York-based BitInstant, and Robert Faiella, a virtual currency trader known as BTCKing did nothing to help Bitcoin and its global reputation.

Jump forward a couple of years and by January 2015 Bitcoin's price had plummeted back to around $224. It was then suggested by the New York Times that with no signs of picking up in price, the Bitcoin industry should brace itself for another decline. In fact, the opposite happened and the price increased again. According to an article in The Wall Street Journal in April 2016, Bitcoin had been more stable than gold, and it was suggested that its value could become more stable yet. 

Back to 2017, and earlier this year in March, the price of a Bitcoin surged to an all-time high and surpassed the market value of an ounce of gold


But where there is smoke, there is fire…

Despite Bitcoin and it's blockchain functioning as a deregulated environment, i.e. those who participate in it are those who manage and regulate it; no central governments or financial institutes hold regulation power, there are a number of significant threats.. A handful of countries have banned Bitcoin and just recently, in the first week of September 2017, China banned initial coin offerings (ICOs) and Bitcoin exchanges. Such a move by one of the global superpowers led to a fairly significant drop in Bitcoin's value but, interestingly, since then the recovery has been strong and some are left wondering whether there was any real impact?

Jordan Hiscott (Chief Trader for Ayondo Markets) said in The Guardian "the returns are truly remarkable, especially given the recent ban on Bitcoin trading in China, where demand had previously accounted for at least 10% of all global volumes."

Does this mean that Bitcoin's bubble is just a myth? At the time of writing this article, a single Bitcoin is worth four times the value of an ounce of gold.. Global Leaders are therefore, unsurprisingly, getting more vocal on the topic of threats concerning the impact Bitcoin could have. Vladimir Putin, the Russian president, has called for 'regulation of cryptocurrencies, saying their use "bears serious risks" such as money laundering, tax evasion and funding for terrorism.'

But these threats are not new threats to our society. They all existed before Bitcoin was invented and will all exist if Bitcoin disappears. What is clear is that Bitcoin is gaining common traction in the market place. Take a look at this list of retailers in the UK alone who currently accept Bitcoin as a form of trading currency.

So, given Bitcoin's volatile market value, it is all speculative as to whether it will survive and possibly even thrive. But what is very clear is that the growing popularity for accepting Bitcoin as a trading currency in the marketplace is securing both name and reputation. Banks who are publicly rejecting Bitcoin but building their own version of the blockchain model behind the scenes are not investing millions of dollars to do so on a whim. They believe there is longevity in this model. Maybe the way Bitcoin will really hit mainstream is when Governments and banks 'get on board', but that would require significant regulation.

The introduction of the Bitlicense by the New York State Department of Financial Services in August 2015 was the first to try and navigate this new terrain. But many felt it was a hindrance rather than a supportive piece of regulation; aimed at controlling the one currency that was designed to never be controlled by a central organization. That said, cryptocurrency is often described as a Wild West environment at the moment, some form of regulation not only appears inevitable, it could find itself playing a very important role in risk-reduction to the masses who are intent in seeing this concept succeed.

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Disclaimer: The finance industry is undergoing significant change at a rapid pace, this series of articles is not a comprehensive analysis but a snapshot cryptocurrencies and some influencing factors. Every attempt has been made to ensure that the information provided is accurate. However, neither Planet of finance nor any of its employees makes any representation or warranty (express or implied) in relation to the accuracy, reliability or completeness of any information or assumptions on which this document may be based and cannot be held responsible for any errors. No liability is accepted by Planet of finance (or any of its affiliates) for any loss (whether direct or indirect) arising from the use of the information provided. 

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