Making Sense of Bitcoin’s Price Increase and Rollercoaster Ride


| Analysis

Page 2 – Digging Deeper into Factors Pushing Bitcoin Higher

Pure Speculation

While Bitcoin does offers true utility—the ability to send money to anyone else in the world without needing to trust any third party—a tremendous amount of Bitcoin’s current valuation is assuredly speculative in nature.

Put another way, a lot of people have bought into Bitcoin believing it will be worth more in the future than it is today. They may or may not be right, but that belief has greatly contributed to Bitcoin’s rocket-like rise in 2017.

Some believe the huge rise has resulted in a bubble that will soon pop and leave a lot of people high and dry. They may be right. They may not be. People have been calling Bitcoin’s price a bubble since it hit a dollar a bitcoin. One of the better Hitler YouTube videos I’ve seen is from 2011 with Hitler ranting about paying paying 10,000 Bitcoins for a pizza when they were now worth $18.

The thing is we might be in a bubble, or we might be at the beginning of the wider world waking up to Bitcoin’s potential. I don’t have the magic answer to that—no one does, but Bitcoin appears to be holding at its new high levels as of this writing.

Bitcoin Bubble

Bitcoin Futures on the Chicago Exchange

Another recent factor is the news that the Chicago Exchange will be adding Bitcoin futures starting on Monday, December 11th, 2017. This has had multiple influences on Bitcoin’s price.

For one thing, it’s seen by some as another sign of Bitcoin’s increasing acceptance as something that’s real. Being blessed—however obliquely—by the Chicago Exchange seems to make some people feel that investing in Bitcoin is safer.

Next, this move is making the rich and powerful on Wall Street sit up and take notice. These folks may be bringing some of the more serious money we’ve seen pour into Bitcoin.

This may include a big push to own a position in Bitcoin before those futures actually launch. If that’s the case, there’s no telling what will happen once they do.

Increasing Awareness Driving Increased Buy-In Driving Increased Awareness

This is sort of the human-nature segment of this piece: as Bitcoin rises in price, more people check it out and become interested. As some of those people buy-in, the price rises more, driving more headlines and attracting more people, some of whom buy in…etc. It’s somewhere between a virtuous circle and a vicious cycle, depending on your point-of-view.

Limited Number of Bitcoins

Bitcoin scarcity is absolutely playing a role in the current rise. With real-world commodities, an increase in price leads to more money people applied to production, which will increase the supply. A gold mine that isn’t profitable to mine at $1,000 an ounce could well be profitable to mine at $2,000 an ounce. A old steel mill that’s not profitable at $300 per ton may well be profitable to operate if steel were to rise to $750 per ton. Etc. etc. The more something is worth, the more incentivized people are to get or produce more of it.

With Bitcoin, however, more money applied to Bitcoin mining doesn’t result in more Bitcoins being mined. It only shifts who gets the same amount of Bitcoin that would have been mined anyway. (Note that this is a gross oversimplification, but it’s close enough for all but much more technical discussions).

This is because the Bitcoin network is designed to produce new blocks of Bitcoins every 10 minutes (on average). Throw more processing power at the network, and the network will make its math harder to do, an adjustment that happens roughly every two weeks.

It’s sort of a zero sum game. One party might get more of the bitcoins being produced by throwing more processing power at the network, but it comes directly at the expense of every other miner.

In total, there will only be 21 million Bitcoins produced. Some 16.7 million of them have already been mined. The remaining 4.3 million Bitcoins will take another 123 years (roughly) to be mined.

So when you get lots of money being pumped into the market, the price can only go up because the supply is all but static.

FOMO

If we’re in a bubble, there’s no doubt that FOMO—the fear of missing out—is a contributing factor. It’s what happens when lots of people jump in on something after it’s already risen to its justifiable value, pushing it beyond that value.

The amount of money that’s poured into Bitcoin—transactional volume in the last 24 hours is more than US$5.7 billion—suggests this current rise is more than FOMO, though.

I can’t prove it, but my gut says we’re seeing some concentrated wealth being moved to Bitcoin. And while rich people aren’t always smart, I think there is some smart money involved.

Beware the Pump and Dump

A pump and dump is an old term that predates Bitcoin by forever. It’s the idea of driving the price of something up so that you can then sell your remaining supply at a much higher price. Bitcoin’s market cap is $262 billion. While huge, it’s small enough that it takes less money to move the price in one direction or another than, say, the U.S. stock market.

Plus, it’s an unregulated market.

The bottom line being we could be in the midst of a deliberate pump and dump scheme being perpetrated on the larger Bitcoin community by a cabal of crooks. I doubt that’s the case, but what do I know? Very little, aside from the fact that there are a lot of eyes—eyes smarter than mine—scouring the Bitcoin blockchain for information. I haven’t found even a whiff of taint in Bitcoin’s rise, other than a general uncertainty about the rise itself.

Still, if you’re interested in Bitcoin, you must be aware of those dangers.

Conclusions

I don’t know exactly why Bitcoin has leapt in price, but I think it’s a confluence of many factors. That includes an increased awareness in Bitcoin and cryptocurrency as a viable technology with important commercial uses.

I also don’t know if Bitcoin is going to crash or keep rising. What I do know so far is crashes have been temporary setbacks. I also know that past performance is no predictor of the future.

In short, I’m cautiously optimistic, and keenly aware that my tiny stake in Bitcoin could be worthless at any moment. But everyone’s risk tolerance is different. I encourage anyone looking at Bitcoin to research as much as they can and understand their own risks.

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