Bitcoin is not dead after all. Many sceptics have come to this realization in May after Bitcoin’s price surge. The most popular cryptocurrency is up over 100% this year making the Bitcoin software superior asset class compared to stocks, bonds or other traditional investments. What’s going on?
Let’s have a quick overview of the Bitcoin first. Only a small percentage of the world’s population is familiar with the topic, so it’s a good idea to go through the basics.
Bitcoin is a currency and a payment network
Bitcoin is a cryptocurrency using a technology called blockchain. It is 100% digital money. The Bitcoin white paper was presented in October 2008 by a pseudonym Satoshi Nakamoto. His identity is still unknown.
Bitcoin was first an anarchist movement and gained popularity in the cyberpunk community. It was created right after the 2008 financial crisis. There was a demand for a new form of money, which was not manipulated and controlled by the central banks.
Satoshi Nakamoto started the Bitcoin blockchain in January 2009. It was first a test environment for a handful of people, but the virus started to spread fast. Nowadays there are millions of people working with blockchain project and services all around the world.
What is Bitcoin, really? In practice, it is a global network of tens of thousands of computers (called nodes). They run the Bitcoin software and pass on the transaction to miners, which add them to the blockchain.
The Bitcoin blockchain is decentralized to nodes, which means there is no central server. The network cannot be censored, hacked or manipulated. A Bitcoin transaction can’t be stopped by anyone.
It’s important to understand that Bitcoin is both a payment network (as described above) and a currency. You cannot separate them and look Bitcoin as money like USD or EUR. The value of Bitcoin comes from the fact that it’s a permissionless global network outside the banking sector used by millions of people.
Bitcoin’s price history
Bitcoin has gained lots of attention recently due to its price movements. Bitcoin has broken through 5000$, 6000$, 7000$ and even 8000$ in a couple of weeks.
Such movement is nothing new. In fact, just two days ago the Bitcoin price crashed from 7500$ to 6500$ overnight. The elevator goes fast up and down.
Bitcoin’s price has moved up and down in clear cycles through its history. It has crashed down several times 70-90% from the peak but always recovered back to all-time highs.
The previous long bull run started in early 2015 and ended in December 2017. Bitcoin’s price moved from about 200$ to 20,000$ during this period. Other cryptocurrencies gained thousands of percentages as well.
The bubble burst in January-February 2018 in a violent fashion, just like it has done before in Bitcoin’s history. The price went down below 6,000$ in less than two months after the ATH price. Eventually, Bitcoin crashed all the way to 3,100-3,200$ in December of 2018.
Bitcoin has become an institutional play
Bitcoin price eventually found a bottom and the market run out of sellers. The price started to recover clearly in March 2019. Now it seems like the bear market is over. What is driving the price up?
That is the million-dollar question. Some people say it is Chinese money due to the U.S. vs China trade war, but that’s probably just a small part of the puzzle.
It seems that Bitcoin has become an institutional play. These custody services have been built during the bear market of 2018. The development in the background didn’t show in the price, which kept plummeting regardless.
For example, the Bitcoin futures market didn’t exist during the previous bull run. It was launched in December 2017. The liquidity has also grown massively in the OTC and margin trading services.
There are also lots of good news and technological advances like the Lightning Network.
One major thing driving this price action could be an event called the Halving. Let’s dig a bit into that concept.
A new block is added to the Bitcoin blockchain every 10 minutes. When a block is created, 12.5 new Bitcoins come into existence as a reward. The reward is then picked by the mining syndicate and practically sold to the market right away to cover the electricity and other costs.
The number of new Bitcoins halves every 210,000 blocks, which means about every four years. Next time this happens in May 2020. When the supply is cut by 50%, it has a deflationary impact. Hence, the Bitcoin price has seen significant movement up after (and right before) each halving.
It looks like a perfect storm is building for Bitcoin. If the history repeats itself, we’d see 30,000 – 50,000$ range prices for Bitcoin in 2020.