What You Should Know About Bitcoin's Ridiculous Surge In Value
The price of Bitcoin came close to hitting $20,000 today before settling down around a still-insane $16,000. The cost of one Bitcoin began the year around $1,000 and surprised investors when it first hit $10,000 just 9 days ago. The stunning, if volatile, rise of Bitcoin is making early adopters of the cryptocurrency very happy. Everyone else is left confused and nervous about whether this is a bubble and when it will burst. Here's what you need to know about the Bitcoin's strange recent skyrocketing.
No One Knows Exactly Why Bitcoin Is Booming, But It Might Have To Do With ICOs
The rise this year of "initial coin offerings" — in which startups raise money by selling cryptocurrency "coins" rather than traditional "shares" — has probably encouraged the Bitcoin rally, as The Atlantic's Derek Thompson explains:
There are several ways that the ICO craze feeds, and is fed by, the bitcoin boom. First, some analysts believe that the most lucrative ICOs are driven, not only by gullible rubes, but also by bitcoin millionaires who want to diversify their investments without paying tax by cashing out of cryptocurrencies, which would trigger a capital-gains tax. ICOs fulfill that need.
Second, many ICO investors first convert their cash into bitcoin before buying tokens in a new cryptocurrency. As Tim Lee argues, this makes bitcoin the "reserve currency" of the crypto economy. Just as the U.S. dollar benefits from its status as the world's reserve currency, accepted worldwide in lieu of or in exchange for the local currency, the same is often true of bitcoin in cryptocurrency markets. It's possible that these factors work together in a feedback loop, where bitcoin millionaires seeking diversification raise the profile of ICOs, which increase the value of bitcoin.
[The Atlantic]
Soon, You'll Be Able To Trade In Bitcoin Futures, Which Probably Also Has To Do With The Surge In Price
Another factor in Bitcoin's recent explosion in value is the announcement that Bitcoin-based derivatives will launch on two major financial exchanges — the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange CME — starting on December 10.
Many market-watchers said the launch this weekend of bitcoin futures by CBOE, one of the world's biggest derivatives exchanges, was helping drive up the price on expectations it would draw more investors to the market.
"Futures trading will mean more demand… and is a form of ratification of the underlying tech — bitcoin and cryptocurrencies in general. They are now on the main stage," said Charles Hayter, founder of cryptocurrency data analysis firm Cryptocompare.
[Reuters via The New York Post]
The Rally Might Be Part Of A Plan By Investors To Short Bitcoin And Then Sell Their Bitcoin Holdings
The wild spikes in Bitcoin's value could reflect a deliberate ploy by investors trying to maximize their profits when they ultimately bet against, or "short," Bitcoin on the exchanges, as Gizmodo's Rhett Jones points out.
Maybe people just genuinely feel that futures are going to be a healthy development for the future of Bitcoin. Bloomberg has argued that futures might help stabilize the runaway Bitcoin prices. Unfortunately, in the short term, it's possible that big time Bitcoin players are pumping the price before betting against it and dumping their holdings.
[Gizmodo]
But Financial Times' Izabella Kaminska explains in a somewhat technical post why trying to short Bitcoin could be a fool's errand.
Ordinarily, a platform would wait to see what end of day differential is necessary to hedge, before going out into the market to cover its position. But with bitcoin's wild volatility, even a small delay in hedging can expose a platform to mismatch risk, since the price of bitcoin can move so quickly you can't hedge quickly enough to cover your price exposure. This encourages some level of pre-hedging, which carries its own price risks.
The second problem is a lack of liquidity and uniformity in pricing. Big platforms have a lot bitcoin to hedge. That's often not so easy in a fragmented marketplace where the price can deviate between exchanges by multiple percentage points.
[Financial Times]
Or It Could Just Be Good, Old-Fashioned Speculation
Since Bitcoin is a digital currency with no intrinsic value, it's worth as much as people think it's worth — and there might be a bit of herd mentality going on in that regard right now.
Some experts say the biggest force pushing bitcoin prices higher this year has been ... higher prices.
Investors have been buying in this year out of "FOMO," or the fear of missing out, according to Dave Chapman, managing director of Octagon Strategy, a Hong Kong-based cryptocurrency exchange.
"There is admittedly a lot of speculation in this market," he said.
[CNN Money]
Coinbase And Other Cryptocurrency Exchanges Are Struggling To Keep Up With Demand
Coinbase, the most popular cryptocurrency exchange platform, has gone offline multiple times in recent weeks due to surges in traffic from prospective buyers. Today, Coinbase users got messages saying that Bitcoin was unavailable and that Bitcoin sales had been temporarily disabled. The New York Times' recent profile of the company portrayed it as "a start-up straining to keep up with growth."
The number of people with Coinbase accounts has gone from 5.5 million in January to 13.3 million at the end of November, according to data from the Altana Digital Currency Fund. In late November, Coinbase was sometimes getting 100,000 new customers a day — leaving the company with more customers than Charles Schwab and E-Trade.
The company faces challenges that are a reminder of the early days of now-mainstream online brokerages, which suffered through untimely outages and harsh criticism from traditional finance companies and government regulators. And Coinbase's missteps make it clear that the virtual currency industry is still young, with little of the battle testing that other financial markets have faced.
[The New York Times]
What's more, Coinbase and other cryptocurrency exchanges can't seem to agree on how much Bitcoin is actually worth at any given moment.
On Coinbase's GDAX exchange, for example, the price of bitcoin is trading above $18,259.00 as of press time. This value represents a significant premium over the price currently being reported on Bitfinex, where bitcoin is trading at $15,592.
At the same time, it's a considerable amount less than the prevailing price on Bithumb, South Korea's most voluminous exchange, and local exchanges Coinone and Korbit, all of which are seeing prices above $19,000 (denominated in the won, the country's national currency).
[Coindesk]
Many Mainstream Financial Institutions Are Very Wary Of Bitcoin
Many traditional bankers, like Royal Bank of Scotland chairman Howard Davies, have issued warnings against investing in Bitcoin and Bitcoin-based derivatives in recent days.
"Put up the sign from Dante's Inferno — 'Abandon hope all ye who enter here' – I think that's probably what's needed," he said speaking on Bloomberg TV, adding that the cryptocurrency appeared to be a "frothy investment bubble"...
The call from Davies follows warnings from other senior figures in the world of finance, including the heads of Goldman Sachs and JP Morgan, as well as the Nobel-prize-winning economist Joseph Stiglitz — who has argued that the currency should be outlawed.
[The Guardian]
For Some Reason, Other Cryptocurrencies Aren't Seeing The Same Gains In Value
Ethereum, Litecoin and other less famous cryptocurrencies aren't being lifted by the rising tide of Bitcoin, and no one really knows why.
In the last 24 hours, bitcoin has left its erstwhile rivals in the dust, gaining 25% in value while the others have fallen anywhere from 3% to 10%.
What exactly is going on here? As with many things related to bitcoin, it’s hard to know for sure. Even though quants have long been poring over price movements to find correlations between bitcoin and other assets — such as those that exist between equities and Treasuries or airline stocks and oil prices — few predictable patterns have emerged.
[Fortune]
Whether Or Not The Bubble Bursts Soon, Investors' Hunger For Bitcoin Is Destroying The Planet
No one knows what the price of Bitcoin will be in a year, a week or even an hour, but we do know that the energy demands of Bitcoin are totally unsustainable on a real-world level.
Digital financial transactions come with a real-world price: The tremendous growth of cryptocurrencies has created an exponential demand for computing power. As bitcoin grows, the math problems computers must solve to make more bitcoin (a process called "mining") get more and more difficult — a wrinkle designed to control the currency's supply.
Today, each bitcoin transaction requires the same amount of energy used to power nine homes in the U.S. for one day. And miners are constantly installing more and faster computers. Already, the aggregate computing power of the bitcoin network is nearly 100,000 times larger than the world's 500 fastest supercomputers combined.
[Grist]