Hardly a noticeable bump in the price chart anymore, January of 2013 was the beginning of the first Bitcoin gold rush. A portion of the Internet was electrified by the boom. At the time, people were mostly buying Bitcoin for one purpose: drugs. Darkweb market enthusiasts everywhere saw the price of their Bitcoins explode from $5 to upwards of $130.
And then it crashed.
In a period of only a few days, Bitcoin lost half of its value, eventually stabilizing around $60. It slowly climbed for most of the year until November, when Bitcoin began to leave the world of narcotics and enter the mainstream. The price exploded more than 1000% over the coming months, and a now dead reflection of the modern Bitcoin ecosystem began to emerge. Companies offering “blockchain solutions” were surrounded by investors who knew nothing of the currency aside from its price.
Still, Bitcoin broke price records daily. Eventually, it appeared on the front page of the Wall Street Journal, one of the most trusted financial papers in the United States.
But Bitcoin crashed again; hard, losing 80% of its value in the span of a few days.
These Blockchain companies, once fueled by a seemingly endless stream of both money and excitement, began to die over the coming years. The pattern was almost identical to the first explosion in price, the one that no one investing in Bitcoin today has ever heard of. Bitcoin started at a value that seemed low, it exploded to a huge all-time high, and then it crashed. But, the value that it crashed to was significantly higher than its starting point. The startups; however, stayed dead. I would advise current-day investors to be conscious of this.
The explosion in the price of Bitcoin now may very likely follow the same pattern, based on over-speculation of a fixed supply. Alarmingly and relevantly, right now more than 95% of all Bitcoin trading volume occurs in China. Much of this is the result of a panic that the Yuan will crash. This panic will end, one way or another.
Ironically this has led to further speculation, China has teased making Bitcoin illegal and a portion of Bitcoin’s price growth has occurred based on the fact that China has not made it totally illegal. This is growth based on the omission of a negative.
The limited supply of Bitcoin has made it a perfect candidate for the kinds of unique price bubbles we see now. National currencies can print money in order to combat deflation, but Bitcoin has no central authority. This is in some ways appealing, but it means that the volatility is almost unlimited. Even more alarmingly, in the cases of both previous boom cycles, volatility appeared to maximize just before the crash.
Some might think that if the price crashes, they will simply wait for the next bubble. But if current prices can make previous ones look so low, the three years since the last bubble may end up seeming short.
For now, Bitcoin is struggling to ensure that it doesn’t outgrow itself through speculation. The price increase has caused transaction fees to skyrocket from $0.20 to in some cases upwards of $20. This is because the fees are a fixed amount of Bitcoin, not dollars. Bitcoin core developers have scrambled to fix this issue using a technology called Segwit, which makes Bitcoin blocks more efficient. But these efforts have led to divisions in the community, including a hard fork of the currency into a second parallel version dubbed Bitcoin Cash. But even the fork hasn’t completely solved the issue, to get any benefit from the change users and companies have to make their wallets “segwit enabled,” and many services do not yet support the feature.
In some ways, Bitcoin does have a real backing. The hashing power of the distributed computing system that runs the Blockchain, made up of people called “miners,” is comprised of hundreds of millions of dollars worth of processing power, which continues to increase fairly steadily.
For some long-term investors, this is probably the only chart they need to worry about. Much of Bitcoin’s price is based on speculation, but at least this speculation is founded on the ever-increasing power of the Bitcoin network as a whole.