FINANCE TODAY | ISSUE NO.22
Bitcoin is the world’s largest cryptocurrency (virtual currency) that is created, traded, and stored through the use of a decentralized ledger system called a blockchain. This electronic payment system eliminates the need for any central authority, unlike fiat currencies such as the Canadian dollar. Bitcoin was invented by the mysterious Satoshi Nakamoto in 2008 and was released as open software in early 2009 (Yellin, 2018). The first real-world transaction occurred in 2010 when two pizzas from Papa John’s were bought for 10,000 bitcoins (Yellin, 2018).
HOW IT WORKS
Bitcoin is a collection of computers that all run Bitcoin’s code and store its blockchain. A blockchain is like a series of blocks, or a public ledger, that contains all transactions within the Bitcoin network. The independent individuals and companies that own computing power and participate in the Bitcoin network are known as nodes or miners. A node is a computer in Bitcoin’s peer-to-peer network which hosts and synchronizes a copy of the entire blockchain. These players are essential for keeping the cryptocurrency running. Miners are the people who process the transactions on the blockchain and are crucial to releasing new bitcoin into circulation. Miners use their computers to solve complex problems in the blockchain and are compensated through the release of new Bitcoins, but also transaction fees paid in bitcoin. Using Bitcoin’s peer-to-peer technology, payments can be facilitated instantly, and the cryptocurrency can be accepted as a means of payment by a growing number of companies. Bitcoin has numerous benefits that have helped increase its popularity. Its independence from political agents, lower transaction fees, and heightened privacy relative to traditional currencies are just some benefits Bitcoin users enjoy.
2017 BITCOIN BUBBLE
In 2013, Bitcoin began the year trading at $13.50 USD per bitcoin (Moore, 2020). While the price per Bitcoin has fluctuated, it continuously increased until 2017. 2017 marked a historic year for the cryptocurrency as the price per Bitcoin soared to $19,783 USD each (Moore, 2020). Many skeptics called this a price bubble, and indeed by April 2018, the price of bitcoin fell rapidly, ending up below $3500 USD by November 2018 (Moore, 2020). The events that led to the meteoric bursting of the 2017 Bitcoin bubble are threefold. First, the US Securities and Exchange Commission determined that two Initial Coin Offerings (ICOs) were deemed regulated securities, and would have to pay back anyone dissatisfied at the original price. It led to over $27 million USD in penalties and reflected poorly on the cryptocurrency industry (Lewitinn, 2020). Hedge funds that initially purchased Bitcoin in 2017 were also approaching their year-end accounting period. December 2017 was the end of the last investment period for many funds, and it was also at the top of the last bull markets. As a result, many funds sold their investments in Bitcoin in a profit-taking move that ended up contributing to the demise of the cryptocurrency market. Finally, the holidays were right around the corner which meant that the demand for Bitcoin fell as people spent physical money on gifts. The combination of these three events culminated in the historic crash, and many people are now wondering if it could happen again.
The markets have been extremely volatile this year, but Bitcoin has defied the odds with steady price increases. The price per Bitcoin began at around $7200 USD on January 1 and has since risen by 155% to close at $18,353 USD on November 23 (Bambrough, 2020). Some analysts suggest that this recent rally is partly fueled by PayPal’s October announcement to accept cryptocurrency and allow it for merchant payments (Bambrough, 2020). This announcement is further recognition of the legitimacy of digital currency and created more consumer confidence. Crypto bulls are also comparing Bitcoin to safe-haven assets like gold, which investors often flock to in times of economic uncertainty (Browne, 2020). The increased adoption rate of Bitcoin is one reason why this run-up is said to be different than the last one in 2017. The 2017 rally was fueled predominantly by retail investors, whereas this time, Bitcoin whales are the main drivers. Whales are simply investors or organizations who own a large amount of Bitcoin, usually over 1000 coins. These whales were selling up to the run-up of 2017, but this time, the number of whales is growing (Browne, 2020). Another key difference is the performance of another cryptocurrency called Ethereum, which led the run-up, but crashed shortly before the Bitcoin fall in 2017. Similarly to 2017, Ethereum’s price rose faster than Bitcoin’s this year. However, Ethereum is still keeping pace with Bitcoin, reaping returns of 23.2% compared to Bitcoin’s 28.4% so far in the fourth quarter of 2020 (Pittis, 2020). Based on the fact that whales are still heavily invested in the Bitcoin market, cryptocurrencies have become more mainstream. Other cryptocurrencies are not showing any warning signs, it seems the Bitcoin bulls may have an extended run before history repeats itself.
Bambrough, B. (2020, February 09). This Bitcoin Bull Run Is Extremely Different To 2017’s Epic Rally. Retrieved November 24, 2020, from https://www.forbes.com/sites/billybambrough/2020/02/09/this-Bitcoin-bull-run-is-extremely-different-to-2017s-epic-rally/?sh=6670a66449c1
Browne, R. (2020, November 23). Five crypto bulls predict what’s next for Bitcoin as it closes in on an all-time high. Retrieved November 24, 2020, from https://www.cnbc.com/2020/11/23/crypto-bulls-on-whats-next-for-bitcoin-as-it-nears-an-all-time-high.html
Lewitinn, L., & Godbole, O. (2020, November 24). Why Is Bitcoin’s Price Rising? Here Are a Few Possible Answers. Retrieved November 24, 2020, from https://www.coindesk.com/first-mover-why-is-bitcoins-price-rising-here-are-a-few-possible-answers
Moore, G. (2020, November 23). 4 Metrics That Show How the Current Bitcoin Spike Is Different From 2017. Retrieved November 24, 2020, from https://www.coindesk.com/bitcoin-rally-2020-vs-2017
Pittis, D. (2020, November 25). Bitcoin heading toward new record high, outpacing gold | CBC News. Retrieved November 26, 2020, from https://www.cbc.ca/news/business/surge-bitcoin-covid-19-gold-1.5814813
Yellin, T. (2018, August 8). What is bitcoin? Retrieved November 26, 2020, from https://money.cnn.com/infographic/technology/what-is-bitcoin/index.html