The world is discussing the ‘stratospheric’ rise of the world’s best-known cryptocurrency, and also the one with highest market cap today, the Bitcoin. (Also read: Understanding Bitcoin) The word ‘phenomenon,’ if has to be attached to something actually deserving, bitcoin is that something. Market watchers have been trumped by the increase in the value of this Blockchain-based digital currency that is not backed by any central bank and hence can be treated more as an asset than a currency.
Here we see what drove the unrealistic price rise of bitcoin since its origin in 2008.
- Backers, or correctly said ‘speculators’
Bitcoin is probably the best living example of speculative investing. When many investors chase a common asset, its value is set to rise. No one can correctly comment on what was the supporting argument of those who invested money during initial phases in this new technology that allows anonymous fund transfers. The list of eminent persons and institutions rejecting the so-called revolutionary technology underlying the bitcoin hadonlygrown recently, more so when the prices had already swollen. Hence the backers had the free ride in the initial few years.
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Funds into Bitcoin-linked products
While the currency had to be mined at the time when it came into existence, its trading gained immense popularity owing to platforms making the exercise easy and handy. Website and mobile applications, which allow tracking data like market cap, current price in various currencies and even forecasts, are now boasting of being a stock exchange in their own rights. Bitcoin also inspired Initial Coin Offerings (ICOs) giving the market alternatives like Ethereum, Dash, and Ripple. More and more companies have taken the ICO route to raise funds.
Also read: Initial Coin Offering – A Phenomenon in Making
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Acceptance by recognized institutions
The recent listing of bitcoin on the largest future exchange of the United States is a shot in the arm. But even before this, recognition of the digital currency as a legalized mode of payment by Japan and few other countries added the much-needed authenticity mark to bitcoin. Although a few jurisdictions like China completely outlawed digital currencies and ICOs, they were looked upon as ones who did not want to lose their grip over the monetary landscape and the rights (power to adjust liquidity and inflation) associated with being ‘currency manipulators.’
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The digital craze
Everyone is going online – from small businesses to individuals – all have pages for themselves over the internet. Why should money then remain confined to being a controlled entity under respective central banks and governments? Bitcoin has been born out of computer programs and is stored over the concept of tomorrow, blockchain, which in itself is a promising technology as it allows decentralized recording of events in immutable blocks. The choice was clear – while VCs and PE funds were investing big in digital startups, small investors had the product customized to their wants and capacities.
One can doubt the ‘bubble’ and ‘tulip’ theories attached to bitcoins and believe Nassim Nicholas, an eminent academic who predicted the 2008 crisis, the forecast of bitcoin breaching the USD 100000 mark. But we still say Bitcoins are a speculative investment instrument hence caution is desirable.
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