Over the last 10 years the rise and rise of Bitcoin has made many investors mind-boggling amounts of money. A perfect example of the increase in the price of Bitcoin’s can be traced back to 2010 with the first ever transaction using this cryptocurrency. A developer used 10,000 of the then little-known Bitcoins to acquire two pizzas. If he used those same 10,000 coins today to acquire two pizzas they would cost him $85 million each!
The never-ending success story
On 1 December 2017 the price of individual Bitcoins broke the $10,000 barrier. The price peaked at just over $19,500 on 17 December 2017 although it fell back to around $12,000 on 22 December and currently stands in the region of $15,000. That is one heck of a volatile investment but one which is attracting more and more interest from both professional and private investors. So, will this success story continue?
There are serious concerns that professional investors will now begin to manipulate the market to take advantage of what has been a monumental rise in the value of Bitcoins. In reality while new Bitcoins are mined on a regular basis there is a definitive number in existence and it simply comes down to supply and demand as to where the price will go. We’ve also seen the introduction of futures options on Bitcoins which has allowed investors to leverage their exposure on the upside as well as gambling on a fall in the value of Bitcoins.
Traditional currencies V cryptocurrencies
If we look at the dollar, pound the euro for example these are all directly linked to underlying economies and countries/areas of the world. They are traded on currency exchanges as Bitcoins are and also susceptible to changes in supply and demand. The problem is that very few people appreciate that cryptocurrencies are not backed by an economy, not based on gold reserves or any other form of collateral. Ultimately the long term popularity of cryptocurrencies will depend upon how many companies will accept payment using these digital currencies.
Over the last few weeks we have seen property companies in Dubai announcing they will accept Bitcoins in payment for their new developments. On the flipside of the coin, we have seen a prominent gaming company stepping forward to say they will no longer accept Bitcoins as payment because they are simply too volatile. If you bear in mind that a 30% swing in the value of Bitcoins is not uncommon, you can only imagine the potential losses incurred by companies accepting Bitcoins as payment but failing to convert them into more traditional currencies as soon as payment is made.
Unconventional currencies
Recently a number of high profile financial experts have stepped forward to suggest that cryptocurrencies, which now number over 1000 in issue, are extremely unpredictable investments. You could argue that traditional finance houses are in some ways losing their grip on currency trading and looking to muddy the water. It is also possible that the growing backlash against “the establishment” has popularised cryptocurrencies such as Bitcoins simply as a way of trading on an anonymous basis.
At this moment in time it is fair to say that the recent volatility in Bitcoins is likely to continue. The jury is still out on the long-term benefits and security of cryptocurrencies but a fight back against the establishment is gathering pace. Are we seeing a move away from traditional establishment controlled currencies towards a “currency of the people” or is this simply another bubble waiting to burst?