You saw the price of a single Bitcoin soar to $20,000. You saw the price of Ethereum rocket to nearly $1,500. And now you see the price of both floundering, thousands of dollars below their all-time highs.
It makes you wonder: Why is Bitcoin so expensive? What is it about cryptocurrencies that see their values soar and dive so rapidly? Where does the value of Bitcoin come from? Keep reading to find out.
Why Do Bitcoins Have Value?
On February 2, 2018, over $100 billion was wiped from the global value of cryptocurrencies. All that money, just gone. Worrying sounds from the South Korean and Indian cryptocurrency markets shook crypto-investor confidence prompting an enormous sell-off. Cryptocurrency markets are volatile. But the number of sudden plunges is a concern for hodlers, new investors, and the strength of cryptocurrencies moving forward.
Bitcoin’s value derives from supply and demand. At least, supply and demand should dictate the price—but the price of Bitcoin is subject to a range of influences that mean it can change without warning.
Let’s break those influences down a little more.
1. Supply and Demand
Supply and demand do have a direct effect on the value of Bitcoin. There are 21 million Bitcoins. The supply at the time of writing is around 17.2 million Bitcoins (also accounting for lost Bitcoins, or the Bitcoins Satoshi Nakamoto mined before opening the blockchain up to other users). Furthermore, the rate at which new Bitcoins release through mining will cut in half every 210,000 coins with the next halving coming at the end of May 2020.
In short, as supply falls and demand increases, Bitcoin’s price will rise.
2. Hype and Manipulation
The run to $20,000 was driven by two things: market hype and market manipulation, with the latter leading to the former. Was the initial surge of interest alone enough to rocket the Bitcoin price that high? In the US, the SEC, the Department of Justice, and the Commodity Futures Trading Commission don’t believe so, and similarly for the UK’s Financial Conduct Authority (FCA).
There is strong evidence that Bitcoin’s price was manipulated to increase market volume using spoof and wash trading techniques. Also, research from the University of Texas, Austin reveals several strong trading patterns indicative of cryptocurrency market manipulation, primarily through the inflation of prices.
The paper found that the Bitfinex exchange used the Tether cryptocurrency (which it owns) to create fake demand for Bitcoin. The exchange would buy up the available Bitcoin using Tether, and the more Tether that entered the system, the higher the price of Bitcoin would rise, “similar to the inflationary effect of printing additional money.”
Many cryptocurrency traders and enthusiasts expressed concern at the addition of Bitcoin futures trading at the Chicago Board Options Exchange (Cboe) and Chicago Mercantile Exchange (CME). As the allegations against Bitfinex (which, along with Tether, ran into difficulties), there is no specific proof against Cboe or CME. Just a whole lot of frantic (read: toxic) trading every time a major Bitcoin futures contract comes to its end.
Cryptocurrency traders and enthusiasts expressed concern at the addition of Bitcoin futures trading at the Chicago Board Options Exchange (Cboe) and Chicago Mercantile Exchange (CME). Bitcoin futures allow institutional traders to interact with the price of Bitcoin without owning any cryptocurrency. Futures contracts enable a trader to go short or long on the future price of a commodity, in this case, Bitcoin.
The first Bitcoin futures were introduced on 18 December 2018. The Bitcoin price subsequently fell from over $20,000 to under $4,000. For a long time, it was difficult to pinpoint how much effect the introduction of Bitcoin futures had on Bitcoin’s dramatic fall. However, comments from former US Commodity Futures Trading Commission (CFTC) chairman Christopher Giancarlo thrust Bitcoin futures role in that massive decrease firmly into the light.
“One of the untold stories of the past few years is that the CFTC, the Treasury, the SEC and the [National Economic Council] director at the time, Gary Cohn, believed that the launch of bitcoin futures would have the impact of popping the bitcoin bubble. And it worked…
“At the leadership level I communicated with Treasury Secretary [Steven] Mnuchin and NEC Director Gary Cohn, and we believed that, should bitcoin futures go forward, it would allow institutional money to bring discipline to the value of the cash market.”
The admission was surprising, although it confirmed the suspicions of many Bitcoin users and advocates.
It isn’t the first time the CFTC has investigated potential Bitcoin futures manipulation. Before Giancarlo’s admission, the CFTC demanded comprehensive trading data from Bitstamp, Coinbase, itBit, and Kraken crypto exchanges. Those exchanges form the basis for the Bitcoin futures prices listed by the CME.
Adding to that, the US Commodity Futures Trading Commission (CFTC) agrees that something might have been going on behind the scenes. The CFTC demanded comprehensive trading data from Bitstamp, Coinbase, itBit, and Kraken crypto-exchanges. Why those exchanges specifically? They form the base of the Bitcoin futures price listed by the CME.
Unfortunately, Bitcoin and cryptocurrency prices aren’t so removed from the world of fiat currency in that regular people can be deeply affected by much larger forces, which is one of the main issues facing Bitcoin and cryptocurrency users.
3. Reserve Currency
Bitcoin began life as a peer-to-peer payment system. It still is a payment system, that’s without a doubt. However, Bitcoin also fulfills another vital role in the cryptocurrency financial system: the reserve currency.
Cryptocurrencies do not have an issuing bank, nor are they controlled by a central government. However, over time, Bitcoin has evolved into the main store of value for the rest of the crypto-world. When people argue against Bitcoin, skeptics say there is no actual value to a Bitcoin. Unlike fiat currency, which holds value because of the trust we put into the currency; a dollar is a dollar for many reasons.
Adding to that, some Bitcoin users argue that the cryptocurrency now has intrinsic value due to its relationship with other cryptocurrencies. Other cryptocurrencies are pegged to the value of Bitcoin, while Bitcoin serves as both a measure of value and a method of trading currency and goods.
And finally, Bitcoin is extremely unlikely ever to use fractional reserve banking techniques to inflate its worth. A Bitcoin can only be a Bitcoin, backed by the blockchain and its immutable record.
How Much Could a Bitcoin Be Worth?
When the Bitcoin price was soaring towards the majestic $20,000 mark, some impressive price predictions hit the media. Bitcoin price predictions range from the fairly outlandish $1,000,000 per coin, all the way down to Bitcoin crashing and burning and never recovering its price.
I don’t think Bitcoin will crash and burn. Nor do I think it will hit $1,000,000 per coin by 2020. The value of a Bitcoin is, to me, such an uncertainty that attempting to predict and model a price accurately can only lead to one thing: wild speculation.
No one can predict the future of Bitcoin. Anyone that claims to be able to give an accurate price is lying. There are simply too many risks and variables when it comes to cryptocurrency that predicting a coin’s value more than a few months in the future is futile.
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