We all know that Bitcoin (BTC) has a reputation for volatility but when you consider the origin, or creation if you like, of this cryptocurrency and some of the associated stories involving BTC over the last ten plus years that’s hardly a surprising attribute.
We all know the beginning - but, just to recap, way back in 2008, ‘someone’ allegedly with the name Satoshi Nakamoto created a whitepaper that was entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.” and then uploaded it to a cryptology mailing list. The whitepaper laid out the concept of the BTC crypto-currency, which was outside the ‘policed’ regulations of the authorities and the central bank system yet it still enabled financial transactions between two individuals who could remain free of oversight and stay anonymous forever more. That was the raison d’être, the essence or the birth of Bitcoin.
The remaining mystery here is to this day that nobody knows exactly who this ‘Satoshi’ actually is. Once Bitcoin was established there was limited further communications from him/her up until mid-2010 when they ceased altogether. Meanwhile, the value of Bitcoins has steadily soared, leading to speculation that if this nebulous figure really exists today then he/she is very rich.
So fast forward to today and the latest news where we can read seemingly sensational headlines quoting one popular investment analyst loudly proclaiming that it is not out of the question for Bitcoin to reach as high as $300,000/£224,128 per coin per coin by the end of this year.
So what is causing the current phenomenal rise? Obviously, as mentioned above, there has been a surge in purchase caused directly by the big name announcements and ‘buy-ins’ during the last quarter of 2020. A sentiment echoed by the investment banking giant JPMorgan Chase & Co and repeated in Bloomberg was that from a long-term investment perspective the fact that BTC was now being seen in the market place as vying with gold as the alternate currency could only be interpreted as a positive for BTC. With this cryptocurrency currently trading at about £25,000, an increase from March 2020 of more than 500%, at which time it was dealing below £3,600, projections from analysts within JPMorgan indicate that it could rise an additional 4.6 times to above £100,000!
These sentiments are being resonated around the economic realm as many other predictors say Bitcoin’s nine-month market swell may be just the start of a far greater price rally.
Yet, as if to counteract all this positive acclamation, earlier this month BTC took matters ‘into its own hands’ and we saw the price plummet by more than £3,600 in what is the single biggest crash in its history. All as if to remind the unwary and the short term speculators of the recent surge we saw from £730 to over £14,000 back in 2017, which was followed by a painful correction that took the valuation right back down to below £3,000. So whilst many analysts and strategists suggest the latest price surge could continue past £70,000 there is a real possibility that it will also retreat harshly shortly thereafter.
Meanwhile on the other side of the fence, depending on your point of view, we had the Financial Conduct Authority (FCA) on 11th January 2020 warning ordinary savers to be extremely wary of putting their cash into the cryptocurrency boom in a bid to chase and capture high returns and not to be lured by the headlines; as such they have disseminated their own counter-deadlines: “Bitcoin: Cryptocurrency investors should be prepared to lose all their money, warns watchdog”.
The FCA went further stating: “The FCA is aware that some firms are offering investments in crypto assets, or lending or investments linked to crypto assets, that promise high returns” the regulator added, what to many is painfully obvious: “Investing in crypto assets, or investments and lending linked to them, generally involves taking very high risks with investors’ money.”
Despite this ‘warning’ being made public three days after BTC had already started its descent - prices had now shrunk above 20% from their January 8th high by the time it was released by the FCA - that didn’t prevent a number of mainstream analysts citing the FCA as a “cause” for the cryptocurrency’s plunge. What they failed, deliberately or otherwise, to acknowledge that from the all-time high near £30,000 achieved on Friday, January 8 the subsequent move had already erased nearly £135 billion from bitcoin’s value.
So back to the beginning again - why do investors move into BTC? There are many reasons not least the sheer novelty value, but for the serious investor there is an apparent value of Bitcoins as opposed to the fiat currency. Bitcoin has assets that make it very comparable to gold in that it is not market-related and is in restricted supply. It is ruled by the developers’ resolution to limit production to a secure quantity of 21 million BTC. The unpredictability is also compelled in large part by varying views in its store of value capability. Store of value allows a future transfer of assets. Bitcoin’s store value changes re frequently established by news events, as exemplified in the above paragraphs, similar to government issued currency.
In addition to this is that a large proportion of the total currency is held by an elite few. For Bitcoin investors with current holdings above around £730,000, it is far from clear how they will liquidate it in the future and there are fears that such a move will affect the fiat market. Bitcoin has not reached the mass market adoption rates necessary to provide option value to large holders of the currency. By its very nature, Bitcoin is open-source and exposes vulnerabilities in the form of security fixes. This approach to security is paradoxical and scares investors.
Many cryptocurrencies have made the headlines for being hacked or for being stolen as has also been pretty well documented in these pages. These high profile losses made the Bitcoin market conservative and there was a scarcity, which lifted the value of the remaining Bitcoins. Though, the earlier anomalies had a constructive influence on later players in the cryptocurrency market exchanges building tougher processes into their own procedures.
States driven by debt also use Bitcoins as a conduit to secure loans, circumventing the USD-based loans that are driven by inflation. According to Her Majesty’s Revenue and Customs (HMR&C) and the Internal Revenue Service (IRS) Bitcoin is essentially measured an asset for tax determinations. The market worth of each Bitcoin has to be logged when paid; hence, this trouble is disconcerting to those wanting to make payments in this coin. Also classifying it as property has the potential of bringing it under similar regulations. This is bound to slow its wider adoption.
To end with here I’d like to add a couple of quite bizarre Bitcoin-related headlines that caught my attention of late.
Firstly, did you read about the UK man that has offered his local council over £50 million to let him search in their landfill for some lost property? Of course this is no ordinary item that he has discarded back in 2013. Allegedly it is a hard drive on which he had ‘stored’ 7,500 bitcoins - which at today’s valuation would be worth approximately £192 million. The question that must be on everyone’s lips is, why has it taken him eight years to remember this ‘mistake’?
Secondly, the story comes from much further East; from Russia to be precise. Recently reported in Tass, the Russian state-owned information bureau: “Hired assassins have begun receiving cryptocurrencies as payment for their crimes, head of the Russian Investigative Committee’s cyber and IT crimes department Konstantin Komarda said in an interview”.
One could safely guarantee that neither of these reported incidents involving Bitcoin was in the mind of ‘Satoshi’ when he started work on his whitepaper!