Bitcoin has been making news since the Christmas period. The price started rallying upwards to reach a high of US$1,129.87 on 4 January. Two days later, it fell by 20%.
Nobody knows the reason for the recent plummet. It could be due to the strengthening of the Chinese yen, or that investors wanted to reap the benefits of the rally.
The graph shows the recent drop:
Source: Australian Financial Review
If you’re not familiar with Bitcoin, it’s both a payment system and a cryptocurrency. A cryptocurrency is a currency that exists only online — just like most currencies in the world now.
Satoshi Nakamoto released it in 2008 as an open source program — transparent software that anybody can change — in response to the bank collapse that year. Nakamoto is a pseudonym; nobody knows the true identity of the creator or creators.
There are a couple of thing that make Bitcoin different.
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The first is that it’s a peer to peer system. That is, there is no centralised authority controlling the currency or the network. Bitcoin achieves this through blockchain technology. The blockchain is basically a shared public ledger, a database that every member of the network can see and contribute to.
The second is that, like gold, it is scarce. Bitcoin’s algorithm mimics the way gold is mined. There is only a limited amount of bitcoin available, and the supply is not expected to exceed 21 million.
Let’s take a look at Bitcoin’s price chart again, but this time, from its humble beginnings.
Bitcoin’s price has plummeted 20% in the last few days. Yet according to The Australian Financial Review, it was the best performing currency in the world for 2016. For the second year in a row.
Bitcoin has had an impressive rise since it started four years ago with a value price of 0. It is purely digital. Nobody knows who has created it, and it is not backed by a centralised system. Yet it has outperformed every single currency in the world.
Since its beginning, Bitcoin has died 119 times, and counting. Yes, there is a website that keeps track of how many times someone has declared Bitcoin dead.
Yet Bitcoin is very much alive. And its price keeps rising.
The thing is, Bitcoin has gained popularity because it is used as a hedge against negative interest rates in developed countries, and a hedge against devaluating currencies in developing countries. It is gaining popularity in countries with high inflation like Venezuela, where the government has not published the inflation rate since 2015. Also in India, where demonetisation has taken a toll.
The big thing about bitcoin is that it has been able to replicate the way cash works. You see, Bitcoin has anonymity and does not need an intermediary.
Don’t get me wrong, Bitcoin is in no way a safe investment. It is a gamble. It has high volatility, as recent events have shown. It is an unprecedented social experiment, which will keep working while there is confidence in its system.
Yet it’s also an investment that is surprising everyone, and challenging the current financial system.
Contributing Editor, Money Morning
From the Port Phillip Publishing Library
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