Cryptocurrency: Boom or Bust

With the meteoric rises in Bitcoin prices during the past few months, more and more people are flocking to the concept of investing in Bitcoin because of its potentially insane return rates. Trading blue chip stocks using sophisticated algorithms for one percent or less of a return on your initial investment also pales in comparison to the explosive power of Bitcoin's shift in value, which seems to promise its holders returns that frequently result in double, quadruple, or even greater multiples of return on their initial investments.

Why bother trading stocks when there is an order of magnitude of difference in the gains to be made with Bitcoin and similarly popular cryptocurrencies if you play your cards right? Recently, the head of one of my friend's trading desks in a wealthy Chicago firm quit his lucrative job dealing with securities to pursue Bitcoin trading. What's really going on here, and will the phenomenon last? Let's dive into the issue.

A Rundown of the Current Situation

To begin, it's not just Bitcoin that's gaining traction. As a striking example, people are willing to consider dumpster diving and looking in huge landfills to find the Bitcoin they've carelessly thrown out that has been stored on physical hard drives. People are waking up and noticing that one Bitcoin is a life changing amount of money at $16k to $17k per coin. The danger lies in the fact that no one really knows which direction the value of Bitcoin will proceed in despite its initial promise will end up in.

Their earnest enthusiasm - such as that of the landfill diver - is incredible and it shows how far Bitcoin has advanced in value as a currency over such a short period of time. Moreover, lesser-known currencies such as Monero, Zcash, Ethereum, and Litecoin are all riding this seemingly growing wave of enthusiasm for cryptocurrencies. But past all of the hype and Bitcoin's amazing run from about $1000 in January of 2017 to about $17,000 currently in December of 2017, the dark shadow of speculation still looms over cryptocurrency.

What Explains The Sudden Increases The Value of Bitcoin (BTC)

There are a number of multifaceted factors contributing to the value of Bitcoin, and it is true that most of these factors deal with the feasibility, popularity, and social understanding of Bitcoin as either a reliable or unreliable method of storing money. A number of people in Asian countries, especially those in China, have been getting increasingly involved in the prospects of cryptocurrency. A strong international acceptance and consensus regarding the validity of Bitcoin as a “currency” rather than a “commodity” is driving Bitcoin values further up. Legitimacy in the form of recognition by formal national market interests creates good press and reputation for Bitcoin and makes people more receptive to investment opportunities.

Further, there was also a time where Bitcoin was touted as belonging to a group of sketchy, unscrupulous criminals who were looking for ways to circumvent the recording of their transactions and make it harder for authorities to trace them. While that was not the intention for Bitcoin's use by their creators, the so-called “Dark Web” in spaces like Dream Market or Agora Marketplace have undoubtedly given the fledgling Bitcoin the credibility and value it needed to ultimately expand past illegitimate uses in its nascent stages.

Now, regulations and tracking methods for authorities have gotten much for sophisticated and keen when it comes to the matter of illicit transactions involving Bitcoin, but it remains a fact that Bitcoin will never separate itself completely from its shady beginnings. Despite the negative stigma that Bitcoin has received as a result of its associations in the past and its continued associations with these criminal activity related transactions, the attitudes of the general population have gradually begun to shift due to a number of countries and economic instruments that function to promote the legitimate use of the currency.

Essentially, new markets have opened up for Bitcoin globally, and Bitcoin's shedding of its negative image associated with criminality in this recent years has allowed for this interface. There are licensed sites hosting important exchanges such as Gdax or Poloniex that handle the trading of cryptocurrencies and cash, specializing in these transactions. Again, legitimacy stands as one of the primary reasons for the huge increase or boom in the BTC to USD rates over the past few months.

The use of Bitcoin as a financial instrument has also contributed to the crazy increases in value that we have seen over the past few months. For example, consider the impact of Bitcoin futures, as documented by Bloomberg: “Bitcoin futures expiring in January were 18 percent higher at $17,710 as of 12:25 p.m. in New York from an opening level of $15,000, on 3,561 contracts traded.” Clearly, this ties in with the theme of legitimization again since the fact that Bitcoins are now being used to fulfill a host of innovative modes of trade has attracted consumer interests and appear to have a connection with the trading prices.

Things To Keep An Eye Out When Investing into Cryptocurrencies

The real money lies in some complex analysis of the statistical trends that are captured through the order book, price charts, market size, spread, and a number of other variables. The second way to get a lot out of the current cryptocurrency craze is to take advantage of developing cryptocurrencies offering ICOs or ICO-like agreements. One such company attempting this funding attempt, B3 Coin structured the payments in a strange manner and are now dealing with a fair degree of losses as a result due to the mishandling of publicity on the part of the owners. Awareness is key when it comes to investing in general and in cryptocurrency.

The last warning, and one that is very intuitive, is the idea that Bitcoin is going to be headed towards a bust or be related to a economic depression or recession in some way. It's much more reasonable to see Bitcoin as the current bubble in the sense that you have a relatively unregulated market, technical problems over hackers stealing Bitcoins from sites, and too much speculation which is fueling and inflating the value of Bitcoin past what its actually market value should be. There are eerie parallels with the subprime mortgage crisis in 2008 in terms of speculation and a lack of awareness by people investing significant money into Bitcoin, and the general, cyclical nature of depressions and recessions show that our nation is due for an economic downturn in the next few years.

There isn't a robust enough electronic infrastructure in place at the moment to generalize and make ubiquitous Bitcoin transactions to the level of credit card transactions. It is important to remember that Bitcoin won't pay for a meal at a restaurant, but cash will. This limitation, perhaps, may lead to more problematic issues over Bitcoin's future prospects, along with rampant speculation.

However, despite the fact that many physical locations and shops aren't warming up to the idea of accepting Bitcoin payments anytime soon, a number of sites and companies that already deal extensively with virtual payment methods such as eBay or more niche players like Studypool are considering transitioning to accommodate the currency in the wake of its growing value. Boom or bust? What's your take?

Written by richardkyu February 20th, 2016