Written by Altus on Wednesday 31 May 2017
This article first appeared in FinExtra in May 2017
In January, people reacted strongly when Bitcoin passed the $1000 mark. Then in March Bitcoin surpassed the price of gold. So it was hardly a surprise when in May, it reached a new all-time high, trading above $1,400, mostly attributed to strong demand in Japan where it is now deemed a legal means of payment. The price of Bitcoin has tripled in the past year, and I believe it may top £3K in 2017.
The success of the digital currency lies in its universality and convenience, allowing people to do things in an easier way, much like the transport and telecommunications industries. However, just because something is easy does not necessarily guarantee adoption. So what is driving it’s popularity?
This year, the adoption of Bitcoin will be driven by those who operate in the grey economy and thus experience the strongest barriers to value transfer.
A burgeoning ‘grey’ market
To use Bitcoins you don't need any proof of ID. Acquiring and transferring them from one location to another is extremely easy. Bitcoin rose to infamy due to its use on the dark web as the unit of currency for sites such as Silk Road, best known as an online market for selling drugs. However, Bitcoin is now being adopted by many people who want to move money across borders and hedge against hyper-inflation and currency restrictions, or as in India, banknote demonetisation. This is happening across the globe. Whereas dark web sites such as Silk Road occupy the dark market, this upswing in Bitcoin usage is known as the ‘grey’ market. These activities are likely become more and more mainstream in light of the changing political and economic climate, and this will drive a further increase in popularity. Thus Bitcoin is rapidly becoming a safe haven investment, being free from government interference, and with limited supply.
The right environment
Before the Brexit vote, when the world seemed a safe and consistent place, I put forward the theory that Bitcoin would pass gold as the safe haven currency. At the time I realised that given the right conditions digital currencies would only trend up in value. Since then we’ve seen the right conditions develop; China has a fragile economy, new political direction in the US, the political tsunami of Brexit, and upcoming European elections means we are likely to see more economic volatility.
A consistent value
Almost all currencies are valued by either securing the currency against a commodity or by comparing its value against another currency. Bitcoin is unique; it not created by a sovereign state and without an owning authority. The value of Bitcoin is solely determined by the price someone is willing to pay for it. This is an important distinction from traditional currencies and the key strength of Bitcoin. With traditional currencies, when making international trades electronically you are relying on the availability of supply. If there are not enough dollars, yuan, euros or pounds the value of the currency will increase, or more is issued to cover the shortfall (supply and demand). This means one of two things, either the value of good in transit increases or the currency in question is devalued.
The value of bitcoin is, instead, determined by the value of products within trades taking place. When bitcoin was starting out, there wasn't much trade and therefore there wasn't much value; the value of a Bitcoin was low. Today, as we watch bitcoin becoming increasingly popular, the amount of in-flight trade in goods using Bitcoin mans that the value must increase in order to cover the value of the goods. As there is a limited supply of Bitcoin and the supply will only increase slowly over time to a maximum of 21 million, the increase in trade volumes will result in an increase in Bitcoin value.
So the reason I believe that bitcoin will reach £3k in 2017 is really down to how much the value of trade will increase in 2017. The largest ever bitcoin transaction was on 12th March 2017 at $860K, the largest number of transactions in a single day is a number that increase week on week. This shows a upwards trend of Bitcoin usage, and as Bitcoin is not seen as an tradable commodity by the investment houses, this trend is driven by trade. Which means Bitcoins has to increase in value to meet the demands of higher trade and value volumes and thus higher value transactions.
The value of Bitcoin transactions, with more increasing adoption and acceptance, underpinned by easy access, growth could actually outstrip the original $3000 prediction. If not by the end of this year, then probably in the next. Bitcoin is one to watch.