August 29, 2019
Price of Bitcoin
Bitcoin (and cryptocurrency in general, for that matter) may be one of the most pivotal innovations of our lifetime. There’s a good chance it will go down as one of the most pivotal innovations in history. But what is it? How does it function in the world? How is it being perceived by the public, and how is it treated by governments? This resource is meant to provide ongoing updates to those questions. Because the most important part of the context of Bitcoin is almost always its current and historical price, we’ll start with a price ticker.
What is Bitcoin and Why is it Important?
Bitcoin is a cryptocurrency. Cryptocurrency is a digital currency that uses encryption and coding techniques that allow users to transfer funds without the use of a central authority such as a banking system. There are many cryptocurrencies available today, but the first of these to be developed was Bitcoin.
Bitcoin was described by its creator, Satoshi Nakamoto, as a “Peer-to-Peer Electronic Cash System.” While many such decentralized digital cash systems were attempted, all failed until Satoshi’s system entered the playing field in 2009.
In order to decentralize a cash system, there has to be a general consensus among users on every single existing balance—that’s what a central server would do: keep records of balances and transactions. It seems nearly impossible to maintain a general consensus among everyone, which is why no other system worked up to this point.
Satoshi’s system could also be defined as “limited entries in a database no one can change without fulfilling specific conditions.” When a user requests a transaction, the transaction is made known immediately by the entire network of users; but this transaction can’t be complete without confirmation. Confirmations are made by miners—a term we’ll discuss more in detail later. When a miner does their job in confirming transactions, they are rewarded with tokens of Bitcoin.
Perhaps one of the reasons Bitcoin is important, however, is its ubiquity. While the number of Bitcoins continues to plateau as the blockchain grows, the number of users rises exponentially. Even two years into Bitcoin’s existence, its userbase was relatively small: the number of Bitcoin wallet users stayed under 1,000,000 for several years.
The number of wallet users passed the 5,000,000 mark in 2015. Since then, it’s exploded to nearly 25,000,000 users at the time of writing. If the number of wallet users correlates to total Bitcoin usage worldwide, based on the trends above, we should expect an even faster rate of adoption in the coming years.
Anyone can be a miner, and miners exist to prevent users from abusing the system and forging transactions. Using algorithms, miners have to connect new block with their predecessors. Basically, these miners are solving a bunch of puzzles to build a block and add it to a blockchain. You can learn more about blockchains in the next section.
When a miner has accomplished this, they have earned the right to add coin-base transactions that reward them with a specific number of Bitcoins. Miners can only work for so much Bitcoin at a time though, in order to maintain balance in the system.
Bitcoin uses what is called blockchain. In its most basic terms, a blockchain is an always-growing list of records. These records are called blocks. The blocks in a blockchain are linked through cryptography and contain a unique cryptographic hash from the block before it, as well as a timestamp and transaction information.
Blockchains work as a sort of ledger within the Bitcoin system—or any cryptocurrency system. When a block is created and attached to a previous block, that information is permanent. These blocks are vital to any cryptocurrency system because since there is no centralized figure, they maintain the security. These blocks are what miners work with to validate transactions. When a miner validates a block and adds it to the blockchain, the transaction can be complete.
Since it’s inception, the Bitcoin blockchain has been growing exponentially, growing to just 10 megabytes in 2010 and exploding to more than 149 gigabytes in 2017.
As the blockchain grows, however, Bitcoin becomes more and more difficult to mine. Because of this, the number of actual bitcoins in circulation has begun to taper off. You can see this in the graph below (note the small hockey stick-like growth in 2009 and 2010 compared to the gradual plateau in 2016, 2017, and 2018).
Are Bitcoin and other cryptocurrencies here to stay though? Some believe it is. In November of 2017, the head of IMF, Christine Lagarde, said that cryptocurrencies could displace central banks, conventional banking, and national monies in the long term. In addition, it’s been said that cryptocurrencies could threaten monetary values that have become internationally used, such as the U.S. dollar.
However, investors.com’s April 2018 article states that some businesses have seen a drop-off in the desire for customers to accept Bitcoin.
It looks as if the future of cryptocurrency could go either way.
Is Bitcoin a Bubble?
If you know anything about Bitcoin, you have probably heard the sensation described as a bubble about to burst. The cryptocurrency industry as a whole seems to be something that’s growing and growing, and eventually, it’s going to explode—and not in a good way.
The Bubble Will Probably Burst (and maybe already has…)
New York University professor Nouriel Roubini described Bitcoin as “the mother of all bubbles” in an interview in February 2018. It was about this time that the value of Bitcoin fell 15 percent and below US$8,000. To put this into perspective, the value of Bitcoin was almost US$20,000 at the end of 2017.
Some experts think that the bubble has already burst. Joshua Gans is the Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship at the University of Toronto. He argues that the bubble has already exploded since Bitcoin is down 60 percent since December of 2017.
In his exact words, “This is already a burst bubble. And it could burst some more, all the way down to zero.”
Harvard professor and ex IMF chief economist Kenneth Rogoff thinks Bitcoin will decrease.
“I think Bitcoin will be worth a tiny fraction of what it is now if we’re headed out 10 years from now… I would see 100 as being a lot more likely than $100,000,” Rogoff said.
His reasoning behind his prediction has to do with his long-held belief that the government will rise against any kind of anonymous virtual currencies. This includes Bitcoin, of course. Rogoff’s opinion is that government regulations are likely to pop the Bitcoin bubble.
Against the Bubble
While there are certainly those who are skeptics and non-believers, other experts have different opinions on the matter. For example, Imran Wasim, who is a financial analyst at AMSYS Group, predicts that Bitcoin and other cryptocurrencies will become more mainstream in 2018.
“A lot more money is going to come into Bitcoin, Bitcoin will go up around $30,000-$35,000 this year – the next couple of years? $100,000,” he told News BTC.
Wasim has predicted what has been referred to as a bubble boost, rather than a burst.
Another expert, Oliver von Landsberg-Sadie, the founder of cryptocurrency brokerage BitcoinBro, claims that Bitcoin is only going through some “growing pains.” The marketplace simply needs to mature.
“It’s a sign of the market growing up, and it’s recognizing that cryptocurrencies are not a tool for money laundering or illicit use. I think it’s a step in the right direction,” Landsberg-Sadie said.
Another supporter of the growth of Bitcoin is a well-known name, John McAfee. If you own a computer, you probably recognize his name as he is the founder of the McAfee antivirus software. McAfee’s prediction is that the Bitcoin price will hit $1M by 2020.
The Bitcoin Spike of 2017
In 2017, Bitcoin saw a huge rise in value. Starting the year worth under $1,000, it saw a massive rise to more than $17,000 by early December. Why such a big, rapid spike?
Dave Chapman, the managing director of Octagon Strategy, said that investors that year bought into the Bitcoin phenomenon base on fear of missing out. In addition to this, many financial regulators started to validate the payment system, which contributed to driving higher prices. Japan’s government gave its approval, as well as major financial institutions in the United States.
Bitcoin also saw many mom-and-pop investors buying in.
In January of 2017, Bitcoin started with some increases that were quickly battled back down. The People’s Bank of China fought back against Bitcoin, which led to a drop in trading value. Eventually, China’s fight back led to restrictions and closing of fiat trading.
Then, in March of 2017, the U.S. Securities and Exchange Commission rejected the launch of a Bitcoin exchange-traded fund, causing markets at the time to react poorly. The market dropped almost 30% and recovered just above the $1,000 level.
Despite this decision, several firms filed to create Bitcoin ETFs and in May Bitcoin saw new records. In May, Bitcoin was priced at more than $2,000. A few weeks later, it climbed over $3,000. After a somewhat turbulent but mostly prosperous summer, Bitcoin reached a price of $5,000+ by the beginning of September.
After a bit of a drop-off, Bitcoin was back again above $5,000 in mid-October. By December 17, 2017, Bitcoin reached an amazing, all-time high of $19,783.21.
This happened just one week after Bitcoin made their debut on the Chicago Board Options Exchange. As exciting as that rise was, Bitcoin would see a 30% drop just days later. This drop caused a loss of billions of dollars off the total cryptocurrency market capitalization. By the end of the year, Bitcoin was priced at just above $15,000.
Back in November of 2017, Jordan Hiscott, chief trader at social trading platform Ayondo Markets, said he believed much of Bitcoin’s popularity could be attributed to the lack of external regulations and control by big banks.
“This will resonate hugely with those affected by the printing of money by governments after the 2008 credit crisis,” he added.
Bitcoin saw reports from several news outlets, including Bitcoin News, Coindesk, CNBC, CCN, the New York Times, and many others. This coverage, both negative and positive, helped to feed into the popularity.
How Do People Use Bitcoin?
Unlike other currencies that are based on physical worth—such as the U.S. dollar which was originally based on gold—cryptocurrency like Bitcoin is based on mathematical proofs, as we’ve learned. And like other currencies, Bitcoin is used just the same: as payments.
One of the first major companies to accept Bitcoin as legitimate payment was Dell. Dell did so internationally. This benefitted Dell because transactions using Bitcoin have nearly non-existent transaction fees. Shortly after this, airBaltic became the first airline to accept Bitcoin as payment for flights through their website.
Online currency can be used to purchase pretty much anything, as long as the seller accepts Bitcoin as payment. In order to use Bitcoin, a user has to set up their Bitcoin wallet. There are different wallets to choose from, and they can be accessed through your smartphone or your computer.
Once a user has a wallet, they can start to acquire Bitcoin. Bitcoin is gathered most commonly buy purchasing it with fiat money. Some people choose to become miners, and you can earn money that way by validating transactions. Either way, once you’ve got some Bitcoins in your wallet, you can start spending it online where ever it is accepted. It can also be used to purchase other forms of cryptocurrency.
Additionally, both public and private banks have embracing Bitcoin usage by rolling out Bitcoin ATMs. They’re certainly not widely adopted, but they already number in the thousands. The United States leads the pack with over 1,000 Bitcoin ATMs.
There are a few benefits to using Bitcoin as opposed to everyday currency. For one, all transactions are completely anonymous. Regardless of what you’re interested in and what you’re purchasing, no one can know who you are or why you’re purchasing what you’re purchasing. Another big benefit is the security that Bitcoin provides.
The system is incredibly regulated and irreversible, and since transactions and blocks are permanent, there’s no fear of someone messing with them once they’ve happened. However, hackers are a very real thing, and since there is no centralized entity, if someone steals your Bitcoin, there’s really nothing you can do about it. Whoever has it, owns it.
How Governments Treat Cryptocurrency
For a lot of world governments, cryptocurrency falls into a grey area. There are many widespread opinions around the world that differ from one another on this topic. The best way to learn about how governments regulate cryptocurrency is to take it region by region.
Asia houses most of the world’s cryptocurrency trading, due to its heightened technical activity. However, that doesn’t mean that the whole sector is open to this industry. China is one of the strictest regions when it comes to these online payment systems. In China, crypto exchanges and payments are banned, as well as conversions from virtual currencies to fiat currencies.
Most of the rest of the Asian area operates in a gray area, with Japan being the industry’s lead supporter. Crypto exchanges are regulated, and payments and conversions are not banned.
The majority of the Americas operates within a gray area in a legal sense when it comes to cryptocurrency. ICOs are regulated in the U.S., as well as in Canada. Throughout the Americas, there are no bans on virtual payments or conversions. However, these governments have all issued warnings about investing in these types of currencies.
Europe, Middle East, & Africa
It seems that these regions are still trying to figure out how they feel about Bitcoin and cryptocurrencies. Although, one regulation that’s on the move within Europe is one that will require identification during conversions from cryptocurrency to fiat money.
Most European countries are operating within a gray area as well, with all of them issuing warnings surrounding the dangers of investing in this type of currency. However, there are no bans at this time. France and Russia have stated that they plan to increase crypto regulation.
While South Africa’s markets regulator doesn’t oversee the virtual aspect of currencies, the central bank would like to investigate appropriate policy framework and regulatory regime. This is true in both Kenya and Nigeria. In fact, Nigeria compares Bitcoin trading to gambling. All African regions where Bitcoin exists have stated warnings, and some plan to increase regulation. Zimbabwe has banned crypto payments.
Governmental Cryptocurrency Use
It’s true that some government across the globe have considered the possibility of creating their own versions of cryptocurrencies. Those governments who believe this is a good idea think so because they are hoping to undercut international sanctions. If a governmental cryptocurrency movement were to take place and stick, it could possibly change the international monetary system in big ways.
One of the biggest advocates for this idea is Venezuelan president Nicolas Maduro, who is pitching a proposal to create a virtual currency called the Petro. In his system, each unit is backed by one barrel of oil. He sees this system as access to foreign currencies and goods from around the world. While the country reportedly received $5 billion in purchase offers, not all countries were on board. President Donald Trump of the United States signed an order blocking U.S. transactions in digital currency, digital coins, or digital tokens issued by Venezuela.
In addition to Venezuela, there are other countries that are considering the use of cryptocurrencies. Russia’s central bank has plans to discuss this possibility with countries like Brazil, China, India, and the five former Soviet republics to cover 40 percent of the world’s population. Likewise, China and Sweden have approached this idea, but with no major moves made yet.
Is Bitcoin a Good Investment?
The definition of a good investment often has to do with the longevity of the investment itself. For example, spending more money on a better lawn mower is a good investment because it will last a long time. This saves you time and money and has a lot to do with reliability.
Whether or not Bitcoin is reliable is a matter of opinion. As seen in a previous section, there are experts who think the Bitcoin craze is a bubble about to burst, and there are those who think its possibilities are limitless.
Because there is so much unknown about Bitcoin and its future, the risks are incredibly high. At the same time, taking that risk could eventually result in an investor becoming rich. The prices in the world of cryptocurrency are likely to fluctuate up and down by as much as 30% in a matter of days without warning, as the past has shown us, and as Bobby Ong, co-found of CoinGecko, said.
David Bach, the author of Smart Couples Finish Rich, said that he thinks “90 percent of the cryptocurrencies out there will be worthless within less than five years.” Although, he does think that blockchain technology will ultimately change the way money moves around.
The bottom line is that you should only invest as much as you’re willing to lose—especially with a product as volatile as Bitcoin. And we certainly wouldn’t recommend it over more traditional forms of investment. If you’re into that sort of thing, we really like Abnormal returns, a site run by investor Tadas Viskanta, who aggregates investing content from around the web and is by far one of the best sources on investing.
The Costs of Crypto
One of the unforeseen costs that comes with the use of cryptocurrency is tax differences. If you’ve been using Bitcoin regularly, you need to account for it in your taxes. Those who have failed to report these transactions have faced fines as much as $250,000 and even prison. Taxes for Bitcoin and other cryptocurrencies are different from normal currencies, and the fact that there are more than 1,500 known virtual currencies out there makes this a huge difficulty that many users don’t think about.
Another danger to cryptocurrency that has been noticed is the amount of energy it uses. Recently, there were reports from Iceland saying that cryptocurrency mining is using so much energy that the electricity could run out. Cryptocurrency servers have skyrocketed demands for electricity, and for the first time, these servers may exceed the private energy consumptions.
If this is a danger for Iceland, this energy crisis is something that could eventually be a problem for other countries and regions around the world who can’t keep up with the high demands.
The Future of Crypto & Bitcoin
The future of cryptocurrency holds a mixture of possibilities. With positive expert opinions and governments researching and proposing crypto ideals, the outlook seems as though the virtual currency is here to stay.
At the same time, many experts hold very negative views and warn against the investment of Bitcoin. The reality is that no one really knows for sure where this technology will head, and investments and partaking are up to the individual. Is it worth the risk? Could you lose money? Will you become rich? There aren’t any solid answers to these questions as of yet.
Jed Graham says in his article on investors.com that one day your paychecks could all be in Bitcoin, which is pretty cool. “Except your liquid assets could tumble in value at any moment in this cryptocurrency future,” he continues.
There’s so much that could happen; Federal Reserve could issue its own virtual currency. Larger companies could start issuing digital coins. Cryptocurrency could become the new default.
Or, the system could grow and grow until it bursts and loses all value, and thus losing all investor’s money. It could also slowly die down and fizzle out while people slowly sell what they have and leave the system behind.
Only time will tell.