There couldn’t be a better start for bitcoin to a brand-new year. After reaching a low of $153.90 on the 11th of January 2015, from a previous all time high of $1,163 on the 24th of November 2013, the currency has been slowly rising and rising, with its value appreciation accelerating considerably over the past week, adding $250 to one bitcoin since Christmas day.
The immediate explanation may be that classic cup and handle over the long term weekly period. What caused it no one can really say for certain except that demand has considerably increased relative to supply, but why?
The primary explanation is probably monetary mismanagement in countries as diverse as China, India, Brazil, Venezuela, Nigeria and elsewhere. As I revealed in a previous article, internet searches for bitcoin are at or near all-time high in all of the above countries, except for China which has only seen a spike. In combination, their GDP is far higher than even America’s, thus may be a sufficient explanation by itself.
However, it is just one explanation with many other potential reasons such as the far greater awareness of bitcoin in the west generally and America in particular. During the past two years since bitcoin hit that low of $153, it has been mentioned in popular TV shows, constantly mentioned to explain blockchain technology in every publication one can imagine, including many from household brands, as well as finding itself in tweets from celebrities or semi celebrities.
The effect has been that now, as far as awareness is concerned, bitcoin has gone mainstream in the west. This is easily shown by going to Times Square, as some producers did. Apparently, most ordinary people have heard of bitcoin. Thus, bitcoin is no longer considered a fringe thing. Instead, the word randomly comes up when someone says, for example, that they bought a game from steam, normalizing and integrating the bitcoin option.
Another reason may be the fact that bitcoin has suffered considerably under the Obama Administration. His policies gave us IRS’s unjustifiable double taxation, New York’s disastrous BitLicense, and requirement for bitcoin and Fintech companies to effectively become banks and regulated as such if they wish to operate in a streamlined fashion across all of the United States.
The Trump administration, if indications prove to be correct, will likely follow a very different approach. His many supporters, including some of the more vocal or famous ones, happen to be bitcoiners too. Furthermore, he has given a senior position in his cabinet to a bitcoin supporter. But, more importantly, although bitcoin has appeal across the political spectrum with blockchain technology having bipartisan support in congress, it does appeal more to conservatives on an ideological level as they lean towards giving more freedom to the market.
The best way to illustrate it is the approach of UK’s conservative government. They, uniquely, consider bitcoin similar to any currency for taxation purposes when used as a currency. More significantly, they have not just rhetorically supported the blockchain space, but set up a monetary fund of some £30 million to encourage blockchain innovation and the Fintech industry generally. On wider regulation, for a testing period called a sandbox, they allow companies to throw out the rule book completely, trusting the very capable entrepreneurs with using common sense and general decency in the pilot stage of launching their product. All this has earned the conservative government one of, if not perhaps the only achievement one can easily recall, the crowning of London as Fintech Capital of the World.
Studies, however, suggest that the United States has the most talent and most demand for blockchain technology. A similar approach in America is likely to have far bigger effects for this entire space considering its vastly bigger scale to UK’s. Therefore, anticipating a far more friendly administration, sophisticated investors may have decided that bitcoin now has some considerable upside.
And yet another reason may be gold. It has not behaved as it should. Instead of responding to geopolitical uncertainties by rising, it has gone down. The primary reason, in my view, may be because people are beginning to realize that in such situations gold is of actually little use, compared to bitcoin in any event. It wouldn’t help entrepreneurial Venezuelans, for example, to export some food or medicine or machinery to produce either. Gold, of course would have maintained the value of their wealth far better than their worthless currency, but it could not provide even that function to the Indians whose gold was confiscated by an ostensibly democratic government which, in secrecy and unilaterally, declared part of their currency utterly worthless and gold now a property of the state with no apparent parliamentary or wider debate.
To both, bitcoin would have and perhaps has provided not just a store of value, but also an easy means of exchange. Now, with exchanges across the world and services that instantly convert bitcoin to analogue money or the latter to bitcoin, anyone can pay anyone. The Venezuelan, therefore, might actually get some food and not starve while also not just retain but increase their wealth, at least for the past two years.
It may be that gold investors are beginning to realize this superior functionality as well as perhaps realizing that a shift to bitcoin may now be the primary choice during uncertainty as there is a highly significant inverse correlation between bitcoin’s price and that of gold since September 2016. Bitcoin has risen by somewhat more than gold has fallen, suggesting perhaps a divesting of gold investors to bitcoin, precipitating the inverse trajectory of both.
All four of these significant events, taken together, suggest that bitcoin, regardless of what price does, is nearing the tipping point, a stage whereby it moves from just early adopters to the wider market.
Bitcoin has arrived here by finding many niches, with the main one being as a hedge, but also for international transfers, both purely monetary, such as Epiphyte which can send analogue currency internationally to any bank account for two cent by using payment channels, and potentially for international trade, especially from and to countries that are suffering from high inflation, such as Brazil, Argentina, Nigeria and Venezuela.
Another niche market may be teenagers and more widely individuals who do not have a bank account, especially in the developing world. While they surf the internet, with its reach having significantly increased especially following the adoption of smart phones, they are usually unable to purchase anything, which led to PayPal’s original popularity. The problem is, PayPal now charges hefty fees of $40, $50 or more depending on amounts. It further lacks privacy and, of course, it can shut down your account at any point not to mention that it requires registration and the main way of using it is through a bank account.
We all know of the controversial market where bitcoin acts as true money, performing all functions of store of value, means of exchange, and, uniquely, unit of account. Considering Switzerland’s end to its long-standing banking secrecy, that might be a new and perhaps equally controversial rising market for bitcoin. Somewhat less controversial may be the grey market. That is, things which are not illegal, but you might not want them in your bank statement, such as poker.
As these markets familiarize individuals with bitcoin and incentivize them to gain some, other markets, wanting to satisfy their growing number of customers who have bitcoin, may likewise begin to familiarize with the currency until eventually, potentially, it becomes just another symbol alongside Visa or Mastercard.
All of the above is, of course, speculation. I’m not a financial expert, none of this constitutes advice and you rely on any of it solely at your own risk and discretion. Moreover, I don’t have a crystal ball so cannot say, but if it does reach all time high and maintains a price above it, bitcoin would have surpassed gold parity which is likely to be a significant psychological threshold not just for bitcoiners but the wider world as the currency finally announces its arrival at the world stage.
At that point, central banks will realize they are significantly constrained as any mistake they make would only accelerate bitcoin adoption, further undermining their goals. At that stage, bitcoin would have achieved one of, if not its, main aim– providing stable money by keeping in check its management through competition by private money in line with Hayek’s suggestion:
The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process…only competition in a free market can take account of all the circumstances which ought to be taken account of.
Images from Shutterstock. Chart from TradeBlock.
Last modified (UTC): January 2, 2017 19:39