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Has the Bitcoin bubble burst or is there more to come?

21 Feb 15:00 by Rayah Lindley

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Had we been writing this blog twelve months ago – or even three months ago – it might have taken a different direction. 

Throughout 2017, the cryptocurrency Bitcoin surged in value, rising over 1300% during the course of the year. The chances are that even those of us who have no idea what a cryptocurrency is will have read about the meteoric rise in Bitcoin’s value and wondered if that growth could continue. However, as the new year began, the value of Bitcoin plunged, in January dropping 50% from its peak value, hit just a few weeks earlier.

Looking to the future, expert opinion is divided. Goldman Sachs analysts predict that ‘most cryptocurrencies are heading to zero.’ They liken the phenomenon to the internet bubble and subsequent dot-com crash early this century. However, they do concede that the blockchain - the digital ledger system that records cryptocurrency transactions - could have a “transformative impact” on the global economy. It encourages transparency, and for companies with long supply chains, it could help them track the movement of goods and services more efficiently. 

Not everyone takes such a pessimistic view. One cryptocurrency portfolio manager, speaking at the Davos World Economic Forum, believes that the high volatility is completely normal. He relates it to companies such as Apple and Microsoft, both of whom had rocky rides with their values in their early days, but ultimately became much more stable. Indeed, he predicts that Bitcoin will reach a high of $50,000 this year – around a fivefold increase from the value as we write. His view is supported elsewhere. The organisation finder.com assembled a council of crypto-experts, including financial technology entrepreneurs, Bitcoin investors and financial analysts. This group suggests that Bitcoin will outperform other cryptocurrencies during 2018 and could increase in value to $14,928 by March and hit $43,472 by the year’s end. 

What is interesting about Bitcoin is that it performs none of the of the commonly accepted functions of a currency. Traditional monetary theory states that a currency has three characteristics – a medium of exchange, a denominator of value and a store of wealth. But Bitcoin is not widely accepted; its own value is so volatile that it cannot be held up as a standard, and it is not a store of wealth because it has become so valuable itself.  Indeed, it was never intended to replace traditional currencies. So, it begs the question ‘why has it been so successful?’. The Independent’s financial editor believes it’s because few people fully understand it, and it falls ‘below the radar’. Neither taxable nor traceable, it appeals to those who like to live on the edge (and, frankly, to those who operate beyond the law).

No-one can accurately predict where this currency will end up, but we believe, it’s here to stay in one form or another. The future is undoubtedly unpredictable – with soaring heights and crashing depths – but Bitcoin is a great example of the innovation of cryptocurrency. It will develop and mature, we are sure. It will be interesting to revisit the subject in 10 years’ time and see where Bitcoin has ended up.