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What Exactly is Happening with the Cryptocurrency Bitcoin?

bitcoin

For those of you who didn’t think cryptocurrency was going anywhere, you might have been too quick to judge.  Bitcoin crossed $10,000 in value on Tuesday, which is a watershed moment for the nine-year-old cash substitute.  That means Bitcoin has doubled in value over the last three months.  Which is a due to a run fueled by new interest from institutional investors like venture capital firms but also old passion from longtime enthusiasts for a once-niche payment platform.   China, however, still remains an issue. But behind its rise is also a desire by global investors to insulate themselves against their own currencies depreciating in value.  People who are nervous about money backed by a central bank with unclear controls (such as China’s) have become attracted to Bitcoin.  Why?  Well, it’s an open-source currency that is less influenced by the state of the economy or any looming geopolitical risk.

But is bitcoin a cryptocurrency bubble?  If yes, it’s already much larger than the Nasdaq in the late 90s, the Dow in the 20s, and silver in the late 70s.  Birinyi Associates studied bitcoin in relation to 10 large financial bubbles.  Bitcoin showed particular bubble-like qualities this week, surging past $11,000 before trading back at about $9,600 on Thursday afternoon.  It was valued at around $6,500 in early November.  Of the events that Birinyi studied, they discovered that bitcoin was the third largest bubble.

Let’s talk about what caused this drop in value though?  I mean, people are saying that cryptocurrencies are attractive because they aren’t subject to outside factors that impact other currencies.  But is that accurate?  The cryptocurrency fell as much as 8 percent on Thursday on the Luxembourg-based Bitstamp exchange to hit $9,000 exactly, marking a fall of well over $2,000 in under 24 hours. It then edged back up to trade at around $9,400 in the hour that followed, still down roughly 4 percent on the day. One market-watcher attributed the fall to outages in bitcoin exchanges and the heavy price surge of recent times.

bitcoin

That is only the opinion of one market watcher, but how else can this be explained? The rise has been fueled by signs that the digital currency is slowly gaining traction in the mainstream investment world, as well as by increasing awareness. In the past week, Google searches for “bitcoin” exceeded searches for “Trump” for the first time, even though Donald Trump has been prominently in the news this week.  Several large market exchanges including Nasdaq, CBOE Holdings and CME Group — the world’s largest derivatives exchange — have said they are planning to provide futures contracts based on bitcoin.

New users of bitcoin have skyrocketed in recent weeks, along with the cryptocurrency’s own rise. The evidence suggests that few of the users are buying bitcoin to use it as a means of exchange, but are speculating to increase their capital. Bitcoin’s fall on Thursday dragged down the prices of other cryptocurrencies in its wake, with Ethereum, bitcoin’s biggest rival, falling as much as 19 percent on the day.  But Bitcoin is still on track for more than a 40% price increase for the month.

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