Bitcoin, which is a digital currency (cryptocurrency), saw a 2000% increase in value from January 1, 2017, to December 16, 2017. Today, cryptocurrencies are the world’s fastest-growing asset class with a market cap of $645 billion, up from just $15 billion in 2017.
The lightning rise of Bitcoin led to an accusation by JPMorgan CEO Jamie Dimon, who called it a “fraud worse than tulip bulbs,” referring to the Dutch tulip bulb bubble that burst in 1637. Other critics like investor Warren Buffet labeled Bitcoin a “mirage,” and cautioned people to “stay away from it.” These are both serious accusations. So why are some people so critical of cryptocurrencies?
Up And Away We Go – Or Not?
Bitcoin’s sudden and meteoric rise attracted unqualified investors, some of whom put everything they had into cryptocurrencies despite knowing little about them. The rush of unqualified investors to this new and hyper-volatile asset class is what alerted regulators in the United States and set off an all-in brawl by the media to cover the story. As the hysteria around Bitcoin grew, so did its value; one fed into the other and led to a value climb fuelled by greed and fear. At Bitcoin’s peak, it was worth $19,783 before shedding 50% of its value and dropping below $10,000 in January.
The rise and fall of Bitcoin’s value cemented it into mainstream awareness. There were a few things that allowed this to happen.
The Dawn of National Cryptocurrencies
In 2017, Japan’s Financial Services Agency confirmed that Bitcoin and several cryptocurrencies would be “legally accepted as means of payment” in the country. Other countries have even launched national cryptocurrencies to compete with Bitcoin, like Israel’s “Digital Shektel,” Venezuela’s “Petro,” and Russia’s upcoming “CryptoRubles.” The governments of Ecuador, Tunisia, Senegal, Sweden, Estonia, and China have also said they’d launch digital currencies.
These proposed national cryptocurrencies coincide with the proposal of Bitcoin exchange-traded funds (ETFs) and the launch of Bitcoin futures. This exposed mainstream investors to cryptocurrencies and legitimized them as a financial instrument.
The official recognition of cryptocurrencies by governments and financial markets fuelled the Bitcoin craze, with the ensuing hysteria sending the coin to unrealistic heights before its price correction in January – but these were not the only causes.
Bitcoin’s Celebrity Endorsement
Bitcoin also received praise from people like Microsoft’s Bill Gates, who in 2014 said that “Bitcoin is better than currency,” and that Bitcoin is a “technological tour de force.” John Mcafee, who is the founder of the anti-virus company McAfee associates tweeted: “In the long-term Bitcoin moves above $500,000 within three years. Bets?”
Other business figures who spoke highly of cryptocurrencies include Eric Schmidt, the Executive Chairman of Google:
“[Bitcoin] is a remarkable cryptographic achievement… The ability to create something which is not duplicable in the digital world has enormous value…Lots of people will build businesses on top of that.”
While Richard Branson, the founder of Virgin Galactic and 400 other companies had this to say:
“Well, I think it is working. There may be other currencies like it that may be even better. But in the meantime, there’s a big industry around Bitcoin. — People have made fortunes off Bitcoin, some have lost money. It is volatile, but people make money off of volatility too.”
Is Bitcoin Here To Stay?
Although Bitcoin may have achieved some recognition, it still has a long way to go before it reaches mainstream acceptance. Bitcoin can gain or lose hundreds of dollars in a second, making it risky for merchants to accept. Also, Bitcoin’s expensive transaction fees are another huge problem. Steam, which is an online distribution platform for gamers, stopped accepting Bitcoin during the December craze of last year, citing transaction fees as high as $20 as the reason.
So, Bitcoin might be a victim of its own success with transaction fees, yet there’s also technical limitations of Bitcoin’s network that prevent its use. At present, Bitcoin can process 3 to 4 transactions per second, compared with Visa Inc’s (NYSE: V) 1667 per second. The slow speed of the Bitcoin network increases transaction costs and verification times, making it costly and inconvenient to use.
However, the developers of Bitcoin are fixing these problems with network upgrades named SegWit and the Lightning Network. These upgrades will make Bitcoin cheaper, faster, and easier to use. And if Bitcoin is not up to the task of bringing cryptocurrencies to the mainstream, there are 1,300 other coins to choose from, with 39 of them having market capitalizations of over $1 billion dollars.
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