Ordinarily, a 10th anniversary is a cause for celebration and reflection. But there were few accolades for Bitcoin in 2018. In that year, Bitcoin celebrated the passage of 10 years since Satoshi Nakamoto was supposed to have created the digital currency in response to the global financial crisis. By decentralizing the financial ecosystem, Nakamoto was attempting to shift the balance of power from a select group of financial institutions to the wider public.
- The years 2018 and 2019 were particularly tumultuous years for the entire cryptocurrency industry.
- However, while Bitcoin has failed to gain mainstream popularity—people are not using Bitcoin, either for retail purchases or trading—investor interest (both retail and institutional) in digital currencies has risen dramatically in recent years.
- Bitcoin enthusiasts point to developments within its ecosystem as proof that the virtual currency has staying power.
The years 2018 and 2019 were particularly tumultuous years for the entire cryptocurrency industry. At the beginning of 2018, Bitcoin traded as high as $18,336, but it dropped to a low of $3,400 by June 2019, a loss of about three-quarters of its value. Cryptocurrency markets, which mostly follow Bitcoin’s lead, also capsized in value during this period, falling by approximately 73%.
But the Bitcoin price has been picking up steam again, and investors are starting to jump on the bandwagon—Twitter CEO Jack Dorsey, macro investor Paul Tudor Jones, hedge funder Stanley Druckenmiller, and investor Bill Miller have all recently endorsed the cryptocurrency. Notably, the payments platform PayPal has announced it will accept Bitcoin. Then, in April 2021, the price of Bitcoin surpassed $60,000, boosted by Tesla's $1.5 billion investment early in January.
Whether Bitcoin will become mainstream—either as a store of value or a medium for daily transactions—is under constant discussion. In a withering 2018 editorial, The Economist declared that Bitcoin and other cryptocurrencies are useless. “There is no sensible way to reach any particular valuation,” writes the publication, pointing out a number of flaws in the ecosystem. These include the lack of transparency and security on their blockchains and difficulties in purchasing or transacting with cryptocurrencies.
The Wall Street Journal assessed Bitcoin’s rise in a similar vein, and some investors see Bitcoin as a bubble ready to burst. Investor Mark Cuban has likened Bitcoin to gambling and suggests that investors in the cryptocurrency should prepare themselves for a crash because the price is so volatile.
The Case for Bitcoin as Useless Innovation
Bitcoin’s identity crisis is largely to blame for its volatility. It was originally designed as an international currency and as a mechanism for daily transactions that could seamlessly cross national borders.
Except it didn’t turn out that way.
Over the years, reports have documented its use in money laundering and illegal activities, even as its clunky interface has ensured that consumer adoption remains negligible. The flip side to this story has been the entry of speculative retail investors who have driven up its price to unsustainable levels.
Skyrocketing valuations in cryptocurrency markets have changed the dominant narrative surrounding Bitcoin. It is no longer considered a medium for daily transactions. Instead, the cryptocurrency is being branded as a store of value—an alternative investment similar to gold. But the cryptocurrency faces two significant problems here as well.
The Challenges Facing Bitcoin
The first challenge relates to the bubbles in Bitcoin’s price. There have been several Bitcoin bubbles that have burst, and it remains to be seen whether the current record-high prices will remain. Previous Bitcoin bubbles occurred in 2011, 2013, and 2017. During each of these instances, the price followed a parabolic curve: a sharp increase in valuation that was immediately followed by an equally precipitous decline. During each of these bubbles, Bitcoin’s value rose by triple digits and attracted significant retail capital. Thin liquidity volumes played a major part in boosting Bitcoin’s price in these bubbles.
The second problem has to do with Bitcoin meeting a few of the basic characteristics of a store of value. The Morningstar analyst Kristoffer Inton and his team created a framework to check whether cryptocurrencies could displace gold as an investment instrument. They focused on liquidity, functional purpose, scarcity of supply, future demand certainty, and permanence. Except for scarcity of supply, Bitcoin fails on the other attributes. Not surprisingly, the analysts concluded that cryptocurrencies do not and “will not challenge gold as a safe-haven asset class.”
The Future of Bitcoin
Bitcoin enthusiasts point to developments in recent years within its ecosystem as proof that the virtual currency has staying power.
Various technological advancements mean that cryptocurrency could be used in retail transactions in the future. The number of Lightning Network nodes within Bitcoin’s network has continued to multiply. (Lightning Network is intended to speed up Bitcoin’s network by conducting transactions off its main blockchain.) Cross-chain swaps will enable seamless transactions with blockchains for other cryptocurrencies.
The Bitcoin ecosystem also continues to grow, including a suite of products that expand its range of use cases. In addition to trading with Bitcoin, you can use it as collateral for loans or to buy jewelry. According to some reports, small and mid-size businesses have also begun using Bitcoin’s blockchain to make wire transfers because it costs less.
But the biggest change in Bitcoin’s fortunes could come from regulation. Even as the rejection of Bitcoin exchange-traded funds (ETFs) by the SEC grabbed headlines, there has been a visible softening of regulators' stance. Bitcoin and other cryptocurrencies have become a prominent topic of discussion at Fintech conferences and among U.S. Securities & Exchange (SEC) commissioners.
The COVID-19 pandemic has raised concerns that inflation will pick up as the U.S. economy bounces back aided by vaccines and fiscal aid packages. This is expected to boost Bitcoin further. However, equally possible is that governments crackdown on Bitcoin if the central banks who are experimenting with digital currencies lose interest.
What the SEC Says About Bitcoin
The SEC's commentary on the topic has changed from criticism to clarity regarding the status of some cryptocurrencies. While the SEC has cracked down on cases of fraud and manipulation within cryptocurrencies, commissioners have also encouraged players within its ecosystem to clean up their acts.
The result is that some order has emerged from the chaos of the Bitcoin ecosystem. The formation of self-regulatory organizations for cryptocurrency exchanges is a start. The entry of insurance giants, such as Lloyds of London, into the cryptocurrency ecosystem, is another development that will assuage the concerns of investors, who are otherwise wary of investing in cryptocurrencies. A slew of new investment products, from index funds to retirement accounts, has also made its way into the ecosystem.
While wary at first, institutional investors have warmed to the idea of investing in Bitcoin. Over time, Wall Street’s participation in the industry could be a significant game-changer, especially considering the liquidity they have added to the cryptocurrency ecosystem. Unlike retail investors and short-term traders, institutional investors invest for the long term, and they could play a significant role in stabilizing prices.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.21 bitcoins and 1 litecoin.