Bitcoin gripped the investing world in 2017 and its price increased by roughly 500 percent. In December 2017, Bitcoin hit a peak of almost $20,000. Since then, digital coins have lost $500 billion in value. On February 5th the biggest virtual currency sank to $6,933.
How might we analyze Bitcoin’s impact going forward? We spoke to Dr. Hemang Subramanian, assistant professor, Department of Information Systems and Business Analytics, to examine the risks and value.
What is Bitcoin?
Bitcoin is a cryptocurrency and worldwide payment system. Instead of banks mediating trust amongst the parties involved in a transaction, a set of computer nodes enable these peer to peer transactions. Special nodes called miners confirm and verify transactions using cryptographic algorithms and store a record of all transactions, in an ever growing ledger known as the “blockchain”.
What is a cryptocurrency?
Cryptocurrency is a form of digital good (or an asset) which can, on exchanges, be traded for fiat currency. In more recent times cryptocurrency has come to be synonymous with Bitcoin (and others that follow the Bitcoin protocol).
What has led to the deep plunge in Bitcoin’s value?
Of late, cryptocurrencies have dropped in value because of a few important regulatory happenings globally. Governments are evaluating and modifying regulatory frameworks for cryptocurrency-based assets.
One of the biggest challenges for most governments is to contain capital flight from their shores while maintaining a banking system and a healthy equity market without a credit crunch. With cryptocurrencies that are global in nature, many governments consider them an asset class that can cause capital flight outside their existing monetary system. As a result, they are trying to regulate it.
All of these news have caused a huge dampening in demand for crypto assets causing prices to go down. That being said, any financial market will have to realize the importance of regulation and the evolving regulatory framework, which can only make these markets more mature.
Are Bitcoin and other cryptocurrencies valuable?
The entire net worth of all cryptocurrencies today is still smaller than that of the Top 10 most valuable companies by market capitalization. Actually, the richest man can buy almost every other cryptocurrency other than Bitcoin and Ethereum entirely with his own wealth. He can probably buy a huge number of Bitcoin and Ethereum as well.
What are the major risk factors of investing in cryptocurrencies?
Cryptocurrencies are a new class of asset that is traded 24X7, 365 days a year on private exchanges. Some people find it exciting because the price has risen abnormally high in the past 3 years. Some people find this volatility in prices extremely discomforting.
The risk factors are that this is a class of asset with very little government oversight. Many a times these markets are rife with manipulation. For instance, the same person using different accounts to buy and sell the same cryptocurrency so as to artificially inflate the price, or sell to make a profit. More recently a lot of fraudulent behavior has been detected, and, money laundering instances have been found.
Can Bitcoin’s recent run up inspire a bandwagon mentality that can create a dangerous bubble instead of investing in proven value?
Bitcoin is following principles of economics and principles of market efficiency. It is an asset that is not controlled by a central entity; that is secure, international and fungible, liquid, and is available in a limited supply for trade. This demand, at near constant supply, has caused prices to go up disproportionately in a short period of time, attracting more investors.
What inspires people to sell low? Does fear play a role here?
Fear significantly influences sales. If a large section of traders start believing that the markets will tank, then a bear cycle would take over. However, with Bitcoin’s main use case of serving the underserved or excluded financial segments, by providing access to value, this will take a longer time. In Bitcoin’s case, just by being a global asset that is traded in South Korea, U.S., India and all of Europe, the ripple effect for fear is contained by the fact that markets are geographically distributed and isolated.
What are the most popular cryptocurrencies today?
Coinmarketcap.com and coincap.io list the top cryptocurrencies. The top 4 have consistently been Bitcoin, Ethereum, Ripple, and Bitcoin Cash. The rest of the popular ones are Cardano, Stellar, Litecoin, EOS, NEO, NEM, IOTA, DASH, and MONERO.