Bitcoin was the wonderkid of the financial markets in 2017 with
the price of the cryptocurrency, once dismissed as something
reserved for the geeks, cryptography enthusiasts and the darknet,
skyrocketing to unprecedented levels, alternating with several
nosedives.
However, the eye watering drop in the price of Bitcoin and its
rivals this week on fears of potential crackdown in two leading
markets, South Korea and China, has left many doubting if the
cryptocurrency bubble has indeed burst.
A look into what was the buzz around Bitcoin.
The digital currency world had dubbed it the face of the future
and it was exactly such hubris that was making the bubble warnings
from observers in the traditional finance grow louder each passing
day.
While Bitcoin did return to the limelight in 2016 after a lull,
it is only this year that it grabbed the entire world's attention
as its price soared and there were some measures of acceptance into
the mainstream asset market. A clone of the currency, named bitcoin
cash, also emerged in August last year.
The price of Bitcoin surged nearly 20-fold, or over 1,900
percent, in 2017, from under $900 at the start of the year to a
record high of almost $20,000 around December 17.
Amid repeated calls for caution, the price of Bitcoin plummeted
nearly 15 percent on December 22 to below $13,000, just days after
futures trading in the cryptocurrency began.
On January 18 this year, Bitcoin fell below $10,000 for the
first time since December. As of 5.30 am ET on Thursday, the
cryptocurrency was up 9.33 percent at $11,235.35 on coinbase.
Chicago exchanges CME Group and CBOE Global Markets launched
futures trading in Bitcoin in December. The NYSE filed an
application with the Securities and Exchange Commission on December
20 to list two exchange-traded funds, or ETFs, tracking Bitcoin
futures.
Though such moves added some legitimacy to Bitcoin, analysts and
observers are keeping their fingers crossed over its future, thanks
to the notorious volatility linked to the cryptocurrency. Welcoming
cryptocurrencies into the mainstream could bring them under some
regulatory supervision, they hope.
As the crypto-world went gaga over the recent appreciation of
Bitcoin and other crypocurrencies, voices of caution kept growing
louder. Central banks and governments repeated their warnings of an
asset bubble waiting to burst.
Traditional finance has kept cryptocurrencies at arm's length,
but many investors and bankers are positive about the future for
the distributed ledger technology or blockchain that underlies
them.
Billionaire investor Warren Buffett has warned that
cryptocurrencies are set to have a bad ending and he would not bet
any money on them.
The Bank of America's brokerage arm Merrill Lynch reportedly
banned its clients and financial advisers from buying
bitcoin-related investments due to concerns over the investment
standard of the cryptocurrency and related products.
Meanwhile, hackers are busy revealing vulnerabilities in the
cryptocurrency protocols, challenging developers to come up with
more secure solutions to fulfill the decentralized peer-to-peer
network dreams.
It is mainly the freedom linked to Bitcoin and its rivals that
is attracting users to the cryptocurrencies, which are digital
currencies not issued or controlled by any centralized authority
such as a government, central bank or even a company, and hence, it
is not regulated.
Another factor that was driving the Bitcoin price is the fact
that its supply is limited.
The algorithm that governs Bitcoin generation prescribes that
bitcoins will be created when a new block is added to the network,
which will be the mining reward. There will be a finite supply of
21 million bitcoins in the currency's lifetime. The number of
bitcoins is set to halve every 210,000 blocks, which is likely to
occur once in roughly four years.
In July 2016, the Bitcoin mining reward was halved from 25 to
12.5 bitcoins. The next halving is expected to occur in 2020.
Some are also attracted to the intrigue linked to Bitcoin as its
origin remains murky. And the perceived anonymity linked to Bitcoin
transactions has also retained it as a darling of the darknet.
The real identity of its creator, who used the pseudonym Satoshi
Nakamoto while proposing the digital currency in 2008, still
remains a mystery, despite years of investigation by cryptocurrency
enthusiasts, journalists, government authorities and so on. Several
theories are prevalent and some contenders have also come
forward.
Beyond the regulatory control, the relatively young
decentralized digital currency Bitcoin and its rival
crypocurrencies, still remain a high risk investment for investors.
Their highly volatile price validates the view and they are
vulnerable to hacking attacks that could erase a holding
entirely.
And governments and regulators are yet to figure out how to
approach cryptocurrencies, though they have begun to tax
transactions involving bitcoins.
China and South Korea, which are the main two markets for
cryptocurrencies, are leading the group of countries that have
initiated regulatory measures to curb the excessive speculation in
cryptocurrencies.
In September last year, China banned initial coin offerings, or
ICOs, the crypto-world equivalent to initial public offerings of
company shares.
New measures by the South Korean government require real-name
accounts for cryptocurrency transactions, starting January 20. The
country also plans to have a new law to ban cryptocurrency
exchanges, thus effectively preventing trading in these
currencies.
This week's sell-off in the cryptocurrencies that saw Bitcoin
tumble below $10,000 for the first time since December was
triggered by comments from the South Korean finance minister Kim
Dong-yeon that banning digital currency exchanges was "a live
option."
Other countries are also exploring measure to curb the excessive
exuberance surrounding cryptocurrencies. Governments are concerned
that these unregulated and decentralized currencies would
facilitate money laundering and would be used to fund criminal
activities such as drug-dealing and terrorism.
Bitcoin had already found wider acceptance in the real economy
with big companies such as Microsoft and Dell embracing it as a
payment option for their digital services.
The cryptocurrency is also finding use in physical stores and in
crowd-funding initiatives. A Japanese company is also planning to
pay part of its employee salaries in Bitcoin. In countries with
troubled economies such as Venezuela and Zimbabwe, people have been
using cryptocurrencies to bypass government controls.
The blockchain technology that is underlying bitcoin has found
greater acceptance in fields beyond finance such as pharma,
government services and even in distributing aid to refugees.
The Dubai government has made a road map to embrace blockchain
on a large scale to realize the dream of a paperless and cashless
society by 2020. The city plans to launch its own crypocurrency
emCash.
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