The price of Bitcoin went up by over 210% during the past year, trading from about $450 in mid-2016 to record-breaking levels of $1,400 in May 2017. In the eight years since its founding, Bitcoin has braved skepticism, rejection, and experienced volatility, to the present day, when it’s slowly being recognized by governments and even dubbed as an emerging asset class. Here’s a look at the dynamics behind Bitcoin’s rising price.
Bitcoin was created in the wake of the 2008 global financial crisis to operate outside of central governments, banks and financial institutions. Over these years, Bitcoin’s framework has challenged regulators, as most of them struggled to find ways to bring it under control. This led to some countries banning it or making it illegal, while some others remained observant and the rest worked out ways to tax and regulate its operations. However, the ‘uncertainty’ angle remained in sight. Although there still isn’t a very clear stance by many countries, a number of nations are coming out in support of the cryptocurrency.
Japan has recently recognized Bitcoin as a legal method of payment, although it continues to be treated as an asset, and not as a currency. In India, the Department of Economic Affairs, Ministry of Finance has constituted a committee to examine the existing framework around Virtual Currencies (VCs). The committee will not just examine the present status of VCs in India and around the globe, but will also suggest measures to deal with consumer protection and money laundering. The committee will be submitting its report by July.
At the same time, Russia, a staunch opponent of cryptocurrencies, has taken a U-turn. In an interview to Bloomberg, Russian Deputy Finance Minister Alexey Moiseev said that in an attempt to combat money laundering, the Russian authorities hope to legalize bitcoin and other cryptocurrencies as a financial instrument in 2018. He further stated, “The state needs to know who at every moment of time stands on both sides of the financial chain. If there’s a transaction, the people who facilitate it should understand from whom they bought and to whom they were selling, just like with bank operations.” While, the Bangko Sentral ng Pilipinas (BSP), the central bank of the Republic of the Philippines, issued a guideline recognizing Bitcoin as a legal payment method.
The legitimacy of Bitcoin’s existence doesn’t just come in direct ways; approvals of investment products based on Bitcoin indicate what regulators think - the reason why Bitcoin prices tanked to about $900 levels from $1300 when SEC disapproved of the Bitcoin ETF by Cameron and Tyler Winklevoss. Nevertheless, the SEC was positive for the future, as the document read, “The Commission notes that bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop. Should such markets develop, the Commission could consider whether a bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act.” Interestingly, SEC has now granted a request for review of its decision of disapproval.
The efforts to bring Bitcoin-linked products are a direct result of its growing demand as more and more people are looking to invest in cryptocurrencies. Although there are products such as Grayscale Bitcoin Investment Trust (GBTC), which is traded OTC (filed with SEC for a NYSE listing) and exchange-traded funds from ARK Investment Management, they offer limited exposure and opportunity to invest in Bitcoins. While the former is meant only for accredited investors, the latter have a very small holding in Bitcoins.
However, there is an option to invest for the long-term in Bitcoins for retirement by opening a self-directed Bitcoin IRA account, approved by the Internal Revenue Service (IRS). The scheme has been welcomed warmly and has gathered around $10 million till date, which reflects the underlying confidence of investors.
Bitcoin start-ups have attracted huge investments in Bitcoin and blockchain companies with a total funding of $550 million in 2016, as per a report. Additionally, many prominent investors have been raising direct stakes in Bitcoin, thus suggesting an optimistic future for cryptocurrencies. Billionaire Mike Novogratz recently revealed that he holds 10% of his net worth in cryptocurrencies like Bitcoin and Ethereum . He now predicts Bitcoin to go past $2,000. (Related Reading, see: More Billionaires Are Buying Cryptocurrencies)
“Today Bitcoins have a market capitalization of $23 billion, if two years from now that number is $100 billion, I would not be surprised,” says Amith Nirgunarthy, CEO, BlockStreet.
The Bottom Line
While the above seem to the most evident reasons, there are many geopolitical and economic reasons lying underneath, including Trump’s presidency, rising debt levels in some of the prominent economies around the world, rate hike by the Federal Reserve and, to some extent, exhausted monetary policy options available with central banks. A report by Saxo Bank predicts that Bitcoin could cross the $2,000 mark, “If the banking system as well as sovereigns such as Russia and China move to accept Bitcoin as a partial alternative to the USD and the traditional banking and payment system.” With multiple factors at play, the outlook looks bright. Having said that, as an investor, don’t jump to grab it at its peak. Bitcoin is still reactive to news and will give an opportunity to buy or invest at more reasonable levels.