In order to answer this question, it’s important to start by analyzing the pressure points and potential drivers for Bitcoin. These will help you understand how Bitcoin works and why the market can’t grow in a linear path but will rather follow ‘boom and bust’ cycles.
Now, why do I want to give you this advice? Not to convince you, but to give you the necessary background and information to form your own opinion. None of this information is financial advice but reflects my own views, ideas, and opinions based on my experience in the market. The reason why I started Start2Bitcoin is to find ways to educate and onboard people about Bitcoin, and obviously blogging is one of them. So enjoy the read, but make sure to conduct your own due diligence before investing and don’t just take my word on it!
Ok, let’s first dive into the risks Bitcoin could face while fighting its way through this political game of scammers, regulators and bad actors. I identified five potential pressure points that could bring the Bitcoin price in a downward spiral.
Throughout its lifespan, Bitcoin has encountered countless attacks both through technical and social efforts. Despite these many efforts, the network itself has never been hacked and manages an uptime of 99,99% since it’s inception in 2009, which is unseen in any payment network.
What the news often mentions are hacks on companies that operate on top of the Bitcoin network. Examples of such companies are exchanges, payment providers and miners that provide services for their customers and often hold funds for them. Comparable to Google, Amazon, and Apple that provide services on top of the internet. The biggest hack so far was in 2014, when the exchange Mt.Gox was hacked, good for a total of 850.000 bitcoins. That’s almost 6% of all Bitcoins in circulation! The Bitcoin price took a nosedive to nearly 50% of its value.
Although exchanges and other custodial providers have gone through serious security improvements over the years, hacks are never impossible. Since the Mt.Gox hack, we have seen many other exchanges being hacked, but the amount of Bitcoin stolen or the effect on the price has drastically decreased which is a positive sign of a maturing technology. The most recent hack happened in May 2019 were an unknown hacker managed to steal 7.000 bitcoins from Binance, one of the largest exchanges in the world. The Bitcoin price only slid 3% after the disclosure, and then quickly recovered.
According to a survey done by Adamant Capital and conducted among bitcoin’s most renowned operational security experts, the number one reason what makes third-party bitcoin custodians vulnerable to loss of funds is a general lack of security expertise. They were mostly worried about bitcoin exchanges. Therefore it’s always recommended to keep your funds in your own control using a hardware wallet such as the Trezor or Ledger.
Another potential risk for the price of bitcoin to could go down is an economic downturn. Although this looks odd there’s a logic behind it. Bitcoin is one of those rare assets that are both fully digital and highly liquid at the same time. When investors are faced with margin calls where they have to sell assets in order to compensate for losses in other markets, they could look in the direction of liquidating their bitcoins or their gold. A similar situation happened during the financial crisis in 2008, where gold dropped 30%.
On the other hand, in difficult economic times, people are often attracted to scarce assets such as gold, art, and potentially bitcoin in order to hedge there savings against further depreciation.
Cost of mining
Miners mine bitcoins in order to secure the network. They do this by solving mathematical formulas which require a lot of energy. The more effort they put in solving these formulas, the more energy it requires and the more secure the network becomes. Once solved, miners receive bitcoins in return. To stay in business, the profit at which they mine new bitcoins should be less than the profit miners receive when selling the newly minted coins.
If the price of bitcoin price would drop beneath a certain price range, miners would need to liquidate some of their bitcoins in order to pay for other liabilities such as electricity bills and depreciation of assets. The cost of mining also depends on the difficulty rate on which miners have to mine for new bitcoins. When more miners join the race for mining bitcoins, the difficulty rate increases meaning it becomes harder and thus more expensive. Remember, this also makes the network more secure. The difficulty is expressed in the number of “hashes" these miners can perform every second. Currently, the total bitcoin hash rate reached an almost record of 57 EH/s. As long as the bitcoin price doesn’t drop below $4.000, most miners are still making a profit.
A hard fork occurs when those who are running the bitcoin software don’t agree on a certain update. As bitcoin operates through a consensus model where everybody has to agree, it often leads to a lot of drama. And this is never a good thing. Personal accusations start to dominate conversations, investors lose confidence and the network becomes more vulnerable for bugs.
We’ve seen in the past what kind of effects it had. In August 2017, the network split into two different versions of the software, Bitcoin Core (aka Bitcoin) and Bitcoin Cash. A disagreement in scaling the network, to allow more transactions per second, led to this event. What happened is that some people didn’t agree and started to run their own version of the software. So far we’ve witnessed many hard forks, but only a few were “successful” and brought a significant amount of confusion.
A next big upgrade in Bitcoin is BIP 33 (Bitcoin Implementation Proposal), which increases the fungibility aspects. Through its design, you can track the full history of every single coin. If for some reason, certain coins changed hands during illegal activities such as drug traffic, terrorist acts or corruption, this could decrease the value of that certain coin. Meaning that not all bitcoins would have the same value. This goes against the definition of what money is where all coins should be equal.
Regulators, exchanges and other actors can now work together due to bitcoins nature of tracing coins. Speculation rises that they have more interest in keeping the system as it is.
Although it very unlikely that this could happen, it’s not impossible. We’ve already seen different countries giving warnings about cryptocurrencies or even ban them in general. It’s likely that some regulators will even step in harder. Some of them will lose the opportunity to become the next “crypto valley”. Some major bitcoin exchanges saw it already coming and moved to more regulatory friendly nations such as Malta, Switzerland or Japan.
Having discussed the risks factors for the bitcoin price, let’s now move on to the main drivers of this technology and where future demand can come from. We’ve also identified four opportunities for a bitcoin ascending spiral:
According to a study done by Facebook IQ among millennials, 92% of this generation doesn’t trust banks. It states that they are developing some sense of awareness towards manipulation, monopoly, and misuse of trust from these institutions. Millennials have witnessed the financial crisis in 2008 and learned some valuable lessons from it. As this generation understand the power of the internet, open-source software and communities, they just trust Bitcoin more than Fiat currencies. This last statement is made by the chairman of the New York Stock Exchange that admits something is going on here.
The neat thing about millennials is that by the year 2029, their disposable income is expected to be higher than all the other generations. Meaning that if millennials are looking for investments, there’s definitely a chance they will look into the direction of Bitcoin.
I can’t talk about Bitcoin without mentioning the Lightning network. This innovation leverages the exciting throughput of transactions per second with a magnitude of order. As it stands, the Bitcoin blockchain can process around 7 transactions per second which pale compared to other payment processors such as VISA and Mastercard (25.000 transactions per second). With the Lightning network, it’s possible to have millions of transactions per second without enduring the principles of Bitcoin: transferring value without a middleman.
The rate at which this network is growing is astonishing. It showed already a monthly growth of nearly 50%. Because of the way the Lightning network operates, it’s much more accessible for developers to integrate it into their infrastructure. It definitely kicks the Bitcoin network towards a global payment network.
Investors and institutions
A study conducted by Fidelity found that institutional investors are overwhelmingly favorable about the characteristics of digital assets such as Bitcoin. The most appealing characteristic for almost half of the participants in the survey is the low correlation of the bitcoin price compared to changes in the stock market. Nearly half of the institutional investors see a place for digital assets in their portfolio.
Having said that, here are some other signs indicating “big” money is flowing in:
The CME Group is the world's leading derivatives marketplace offering the widest range of futures and options products for risk management. Their total value of managed assets is valued at $70 billion. They recently announced their own Bitcoin futures product. In case you haven’t got a clue what this all means, find out more in this article.
ICE, the company that owns the New York Stock Exchange, will also launch the Cryptocurrency Data Feed. As more investors are stepping in, access to transparent price discovery data is crucial. Together with Blockstream, they will deliver real-time and historical data for the most actively traded cryptocurrencies.
The same company ICE has also announced another platform called BAKKT. The goal of BAKKT is to make Bitcoin more accessible for institutions, traders and consumers. Although the new platform is not yet live, some big names are already involved, including Starbucks and Microsoft.
Goldman Sachs, a bank with a yearly revenue of $37 billion, has invested $16 million in the startup BitGo. Their ambition is to help institutional investors securely store their Bitcoins and other cryptocurrencies.
Former Wall Street hedge fund manager and Bitcoin proponent Mike Novogratz has stated that institutional money will start coming in over the next 12 months as more and more custody solutions such as BitGo are being rolled out.
One of the major reasons big institutions didn’t step in before was the lack of investment options and custody solutions. 76% considered the latter as their most important consideration before stepping in. As these roads are being built fast, more and more interest is coming. So it will be a race to get your hands on some while the price is still considered “low”.
Killer-apps of Bitcoin
For many years, people were searching for thé killer-application of Bitcoin. Although it was already clear from the start that Bitcoin was here to become the next global currency, it doesn’t sound that exciting, does it? As developments were proceeding slowly in the eyes of some investors, they started to look at other projects such as Ethereum, EOS, and TRON. As these dare to over promise and under deliver, the strength and resilience of this “blockchain 1.0 coin aka Bitcoin” are becoming more and more visible. Let’s discuss some:
Liquidity is a very important feature for investors. It refers to how easily an asset can be bought or sold at the desired price on a given market. The more quickly you can buy or sell your asset at your desired price, the more liquid an asset is considered. It’s about how big the trade-off is between the speed of the sale and the price it can be sold for. This in turns impacts the attractiveness of a certain asset. Bitcoin is one of those rare assets that are both liquid, digital and scarce at the same time. One use-case could be that investors use Bitcoin as hedging compared to other assets. In case they are faced with margin calls, they can take quick actions at their desired price.
During most of history, a nation’s gold reserve was considered its key financial asset. After President Nixon abandoned the gold standard in 1971, also known as the Nixon shock, the reserve asset for nations became the US Dollar. The last couple of years, nations around the world have begun requesting their gold back from US vaults. This could indicate that the United States of America is beginning to lose its reserve currency dominance. So far, Germany, Netherlands, Belgium, Russia, China, Turkey, Iran, etc have already started to accumulate gold. As demand for the US dollar will start to drop, a devaluation is inevitable. Demand for scarce assets such as gold, silver or Bitcoin could be on the rise. As bitcoin is a political neutral asset with unparalleled security, global accessibility, transparency, liquidity, and scarcity, it has all the characteristics to become the new gold standard for nations. Fun fact: the average life span of Fiat currency such as Dollars, Euro’s, Yen is around 50 years. The US Dollar only became a Fiat currency after President Nixon abandoned the gold standard in 1971 …
The price of bitcoin wouldn’t move as much as it wouldn’t be for the technologic developments. As mentioned in the technology section, the Lightning network is making significant inroads as a global payment network. Other developments such as sidechains, taproot, schnorr will give developers more building blocks to have a wider range of possibilities to choose from and build the internet of money.
So, should you?
Well, as this article is not financial advice, I can’t say what you should do. I can only hope I’ve given you enough background to make the calls yourself. As with all investments, one golden rule is to never put all your eggs in one basket, the same applies when investing in bitcoin. This new digital currency is still in its infancy and there are still some pressure points involved. But to put it in a fancy word, bitcoin has an asymmetric risk-return profile. Meaning that the amount you can lose is probably smaller than the potential reward.
Although it’s still very early, the fundamentals are laid out and the roads are being built before our eyes: millennials love it, technology is growing and investors are looking for ways to enter. Once this “big” money starts to float from bonds and stocks into bitcoin, things could start to look different.
I hoped you enjoyed reading this article and learned something new. Please feel free to share this article or ask for further clarification on certain topics. Always happy to help.
- Keep calm, and hodl your Bitcoin -