Bitcoin – The Making Of Millionaires?

The Virtual Currency Gaining in Popularity – And Value.

Bitcoin was created in 2008 as a virtual peer-to-peer  payment currency by Satoshi Nakamoto although some still dispute that it currently meets all the economic definitions usually associated with the term. Currencies are defined as a store of value, medium of exchange and unit of account. Whilst some may dispute that Bitcoin has met all these criterea, its use as a medium of exchange cannot be disputed since the number of merchants accepting Bitcoin as a form of payment passed the 100,000 mark in 2015.

Bitcoin can be bought and sold online and offline in a very similar way to normal currency. Online exchanges offer a bid/offer price for purchase and sell orders in the same way that Foreign Exchange markets do. Due to the infancy of the currency, these exchanges can offer varied prices for Bitcoin at the same point in time depending on their individual ability to meet their trading obligations and the levels of their reserves. Failure rates of exchanges has led to measure implemented in 2013 to allow for transparency in the level of reserves that exchanges hold to avoid exchange failures and losses by individuals of the Bitcoin held with them. However, it should still be noted that a risk still exists and with all things ‘virtual’ it is wise not to keep all your virtual eggs in just the one virtual basket.

With the growing acceptance by merchants, Bitcoins profile is starting to expand and with exchanges providing independent pricing, it did not take people long to work out that the market in Bitcoin could become a profitable place for trading and arbitrage in the same way that all currencies are traded on Foreign Exchange markets around the world. The difference with Bitcoin was that its decentralized nature means that no controlling body has means of influence over the value and its limited supply could mean that its price was likely to be influenced by a simple supply/demand logic.  There is no central governmental control, no interest rate policy or political interference at work with Bitcoin.

Transactions Using Bitcoin Are Rising

In 2014 it was summarized that the volatilty of the value of Bitcoin was deemed to be as much as 8x that of the S&P500, 7x that of Gold or 18x that of the US Dollar. Whilst this may deter some people from venturing to use the new currency, (Its store of Value credentials being somewhat high risk), the inherent volatility also provides great potential rewards.

Price - Volatility of Bitcoin

Price – Volatility of Bitcoin Over Time

 

The above Price Volatility graph above shows the rise and falls in value since 2010. At the beginning of 2017 the price of Bitcoin had reached $1000: 1 BTC. As of writing this article on May 10th the value has risen further to $1589: 1 BTC.

There is much speculation about where the value of Bitcoin could go. Its limited supply may suggest that increased acceptance and usage will create a demand push rise in price with no limiting factors. Figures of $1,000,000: 1BTC have been bandied about in some press reports but as with all markets the limiting factor may be found in profit taking and the limiting of use as a medium of exchange that increased volatility might incur as a side effect.

It may be said that Bitcoin could become the future of trade. We live in a more and more virtual, online world and the direction seems to be only one way.  Consumer spending is increasingly made online and cash as we know it in the form of Paper money and coins may look to have a limited lifespan. Could Bitcoin be the future of money in a globalised world without borders?

We can only watch with interest.

What is apparent, as with any other emerging trading market, is that there is profit….and loss to be made with Bitcoin

 


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