Bitcoin has become a buzz word in the investing community, not as an alternate currency unit replacing the fiat money, but as an asset class with a spectacular 1,600%+ return this year, valuation almost doubled just in the December month alone. Bitcoin was heading towards $20,000 before pulling back to today’s $15,000 level. The entire cryptocurrency market capitalization rose above $600 billion for the first time on Dec. 18, 2017.
Despite what you might have heard people raving about the "money of the future," the fact is that bitcoin and other cryptocurrencies are very expensive and experimental as well.
Existed Since 2009
Bitcoin is a form of digital or virtual currency not as “new” as you might think. It has existed since 2009. In January 2009, a programmer implemented the bitcoin software as open source code and released it under the alias of Satoshi Nakamoto. There have been many rumors regarding the true identity of Nakamoto, but nothing conclusive so far.
A Mining Math Game for All
With many companies adopting it as form of payment and many others getting ready to, bitcoins are an extremely fast-spreading “currency”.
Unlike fiat currency controlled by world’s central bankers and partly backed by gold reserve, Bitcoin is based on mathematics and totally decentralized. That is, much like the precious metal, bitcoin can only be “mined”, not “printed”. All Bitcoin transactions, including Bitcoin creations, are recorded and verified on the blockchain. Today, around the world, people and companies are using software programs and computers following a mathematical formula to produce bitcoins around the world.
How Many to “Mine”?
It seems anyone, with proper equipment, can “mine” bitcoins. The logical question would be is there a limit to how many bitcoins can be mined? According to Bitcoin.org, the bitcoin protocol – the rules that make bitcoin work – say that only 21 million bitcoins can ever be created by miners.
Silk Road Anonymous
Because Bitcoin was purposely designed with anonymity and lack of control in mind, it is quite attractive for criminals. Heard of Silk Road, the darknet black market, best known as a platform for selling illegal drugs? Though the U.S. government shut down Silk Road in 2013, Bitcoin benefited from Silk Road’s headlines and front pages of the mainstream media.
Bitcoin Futures Launched
Bitcoin futures debuted on CME Group late on Sunday, Dec. 17, 2017, and on CBOE a week earlier. Many hailed this recognition by major exchanges as the pivotal moment of bitcoin to legitimacy. However, as Reuters notes:
“…. an almost twentyfold increase [of Bitcoin] since the start of January has also led to increasing warnings about the dangers of investing in an immature, opaque and largely unregulated market.”
The Bitcoin market cap is about $263 billion today. 40% of that “immature, opaque and unregulated” market is held by about 1,000 users/whales as Bloomberg reports:
“….the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market.”
Late Does Not Mean Never
Regulations are notorious for lagging way behind technology. Nevertheless, it is inevitable that sweeping regulations will catch on in the near future. France’s finance minister already said his country would propose that the G20 group of major economies discuss regulation of bitcoin next year.
To sum up,
- The Bitcoin program protocol caps the creation at 21 million bitcoins.
- 40% of the market is controlled by 1,000 whales who know and communicate with each other regarding buying and selling of Bitcoins.
- Currently there are over 1,000 cryptocurrencies in circulation rival to Bitcoin with new ones frequently appearing.
The current Bitcoin Market lacks the proper structure that a healthy asset market should have, that is,
- Reasonable transparency
- Long and short players (Bitcoin right now is a long only market)
- A diversified pool of producers (supply) and users (demand)
- Appropriate regulations/portocols to prevent collusion and market manipulation.
Currently, much of the hype is about getting rich by trading Bitcoin. One thing to remember is that just like any other exotic asset class, Bitcoin is even more vulnerable to the boom-and-bust cycle.
Many traders are on the side line right now waiting for a significant pullback to get in on Bitcoin. The key is to buy low and not develop a sentimental/emotional attachment thus missing the proper selling point. Also it is important to understand opportunities as well as risks in the bitcoin market. Expect much higher than normal volatility and sweeping regulations that could drastically change the market landscape.