A tenth anniversary is usually occasion for celebration and contemplation. However, Bitcoin received little awards in 2018. That year, Bitcoin commemorated the tenth anniversary of Satoshi Nakamoto’s alleged creation of the digital currency in reaction to the global financial crisis. Nakamoto was seeking to shift the balance of power away from a limited set of financial institutions and toward the general people by decentralizing the financial ecosystem. 1
- The years 2018 and 2019 were extremely turbulent for the bitcoin sector as a whole.
- While Bitcoin has failed to attain public popularity—people are not utilizing Bitcoin for retail purchases or trading—investor interest in digital currencies (both retail and institutional) has increased considerably in recent years.
- Bitcoin supporters point to happenings inside its ecosystem as evidence that the virtual currency is here to stay.
The years 2018 and 2019 were extremely turbulent for the bitcoin sector as a whole. Bitcoin reached a peak of $18,336 in early 2018, but fell to a low of $3,400 by June 2019, a loss of about three-quarters of its value. Two cryptocurrency marketplaces, which typically follow Bitcoin’s lead, also had a 73% drop in value during this time period.
However, the Bitcoin price has begun to rise again, and investors are beginning to flock to the cryptocurrency—Twitter CEO Jack Dorsey, macro investor Paul Tudor Jones, hedge funder Stanley Druckenmiller, and investor Bill Miller have all lately praised it. PayPal, for example, has declared that it would take Bitcoin. The price of Bitcoin then topped $60,000 in April 2021, thanks to Tesla’s $1.5 billion investment in early January. 3
It is often debated whether Bitcoin will become popular, either as a store of wealth or a medium for everyday transactions. The Economist deemed Bitcoin and other cryptocurrencies worthless in a scathing editorial in 2018. “There is no rational method to arrive at any given value,” the magazine adds, pointing out many problems in the ecosystem. These issues include a lack of transparency and security on their blockchains, as well as difficulty acquiring or trading with cryptocurrencies. 4
In a similar vein, the Wall Street Journal examined Bitcoin’s rise5, and some investors regard Bitcoin as a bubble about to collapse. Because the price of Bitcoin is so erratic, investor Mark Cuban has compared it to gambling and advises cryptocurrency investors to brace themselves for a fall.
The Case for Bitcoin as Useless Innovation
Bitcoin’s volatility is primarily due to its identity issue. It was initially intended as a transnational currency and a system for everyday transactions that could traverse national boundaries easily.
Except it didn’t turn out that way.
Reports have proven its usage in money laundering and illicit operations over the years, despite the fact that its clumsy interface has guaranteed that consumer adoption remains limited. The introduction of speculative retail investors into this narrative has pushed up its price to unsustainable heights.
The main narrative around Bitcoin has shifted due to skyrocketing prices in cryptocurrency marketplaces. It is no longer regarded as a viable medium for everyday transactions. Instead, the cryptocurrency is being marketed as a store of wealth, akin to gold as an alternative investment. However, the cryptocurrency faces two major issues here as well.
The Challenges Facing Bitcoin
The first difficulty is related to Bitcoin price bubbles. Several Bitcoin bubbles have popped, and it remains to be seen if the present record-high values will last. Bitcoin bubbles have previously happened in 2011, 2013, and 2017. During each of these occasions, the price followed a parabolic curve: a dramatic gain in value followed by an equally sharp drop. During each of these booms, the value of Bitcoin surged by triple digits, attracting large retail money. Thin liquidity volumes played a significant role in driving up Bitcoin’s price during these booms.
The second issue is that Bitcoin has a few fundamental features of a store of value. Kristoffer Inton of Morningstar and his colleagues developed a system to assess whether cryptocurrencies may substitute gold as an investment product. They concentrated on liquidity, functional purpose, supply scarcity, future demand certainty, and permanence. Except for scarcity of supply, Bitcoin falls short on the other criteria. Not surprisingly, the researchers concluded that cryptocurrencies do not compete with gold as a safe-haven asset class and would not do so in the future. 6
The Future of Bitcoin
Bitcoin supporters refer to recent events within its ecosystem as evidence that the virtual currency is here to stay.
Because of technical improvements, Bitcoin may be employed in retail purchases in the future. The number of Lightning Network nodes inside the Bitcoin network has grown steadily. 7 (The Lightning Network is designed to accelerate Bitcoin’s network by executing transactions off of the main blockchain.) Cross-chain swaps will allow for smooth transactions with other cryptocurrencies’ blockchains.
The Bitcoin ecosystem is also expanding, with a suite of products that broaden its range of applications. In addition to trading, you may use Bitcoin as collateral for loans or to purchase jewelry. According to some accounts, small and medium-sized enterprises have started to utilize Bitcoin’s blockchain to execute wire transfers since it is less expensive.
However, regulation may have the greatest impact on Bitcoin’s prospects. Despite the SEC’s rejection of Bitcoin exchange-traded funds (ETFs), there has been a discernible softening of regulators’ position. 8 Bitcoin and other cryptocurrencies have been a popular subject of debate at Fintech conferences and among Securities and Exchange Commission (SEC) commissioners in the United States.
The COVID-19 epidemic has generated fears that inflation could rise as the US economy recovers, assisted by vaccinations and economic assistance programs. This is predicted to increase the value of Bitcoin even more. However, governments may tighten down on Bitcoin if central banks that are experimenting with digital currencies lose interest.
What the SEC Says About Bitcoin
Regarding the status of several cryptocurrencies, the SEC’s stance has shifted from condemnation to clarification. While the SEC has clamped down on examples of cryptocurrency fraud and manipulation, commissioners have also urged actors in the ecosystem to clean up their acts. 9
As a consequence, order has evolved from the turmoil of the Bitcoin ecosystem. The establishment of self-regulatory bodies for bitcoin exchanges is an important first step. Another trend that will ease the fears of investors who are otherwise cautious about investing in cryptocurrencies is the admission of insurance behemoths like as Lloyds of London into the cryptocurrency ecosystem. 10 A plethora of new financial products, ranging from index funds to retirement accounts, have now entered the industry.
While initially skeptical, institutional investors have come around to the notion of investing in Bitcoin. Wall Street’s involvement in the market might be a game changer in the long run, particularly given the liquidity they have brought to the bitcoin ecosystem. Institutional investors, as opposed to individual investors and short-term traders, invest for the long term and have the potential to play a substantial role in price stabilization.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site. The author owns 0.21 bitcoins and 1 litecoin as of the day this post was published.
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