How bitcoin quadrupled in price in six months
18th August 2017 12:11
Bitcoin is trading at all-time highs for the second time this week, touching $4,497 on the Coindesk bitcoin price index at the time of writing. Bitcoin has quadrupled in price in the space of six months with no sign that the bull run will be ending any time soon.
The cryptocurrency has risen more than 40% in August. A number of factors are behind the rise. We consider the key drivers below in a rough-and-ready order of importance.
The short-term risk presented by the implementation of code to speed up bitcoin transaction has dissipated following the successful resolution of the scaling problem - for now - with the implementation of the so-called SegWit2x solution and the lack of downside following the creation of a new version of bitcoin called Bitcoin Cash.
A combination of relief rally because nothing went wrong with the scaling fix and the step forward it represents in the hoped-for wider adoption of the currency as a means of exchange has boosted the price.
Geopolitical angst surrounding the perceived North Korea nuclear threat also prompted buying, with purchases in Japanese yen accounting for 46% of trading value on Friday 11 August, according to trading information and discussion site CryptoCompare.
On 1 April Japan made bitcoin legal tender with a large number of retailers subsequently accepting the digital currency. Rollout to as many as 300,000 stores is currently well under way, although most current buyers are speculating on price gains.
Additionally, moves by investors in Russia to set up a $100 million (£77.5 million) mining operation to challenge the Chinese attracted attention given the closeness to the Russian government of Dmitry Marinichev, one of the entrepreneurs behind the effort.
Marinichev, Russia's internet Ombudsman, says that Russia has excess power capacity and lower electricity prices than China, making the power-intensive computer processing used to mine bitcoin highly profitable at current prices. "Russia has the potential to reach up to 30% share in global cryptocurrency mining in the future," he claims.
The money for the venture is being raised through an initial coin offering (ICO) for Russian Miner Coin, which highlights the growing importance of ICOs and their role in pushing prices higher.
Blockchain project raising money for their own coins or token require investors to buy-in using bitcoin or ether. The ICO promises buyers a right to 18% of the company's mining revenue. It plans to develop and build its own computer chips for the mining.
Further enhancing the allure of bitcoin was the announcement from giant US fund manager Fidelity on 9 August that its integration of Coinbase bitcoin holdings into its client portfolio systems had gone live.
Coinbase is the largest bitcoin exchange and services company in the US. Hadley Stern, senior vice president and managing director at Fidelity Labs, told Reuters: "This is an experiment in the spirit of learning what these crypto assets are like and how our customers may want to interact with them."
Staying with the financial blue chips, Goldman Sachs issued a Q&A on cryptocurrency investment to its institutional clients earlier this month.
"Whether or not you believe in the merit of investing in cryptocurrencies (you know who you are), real dollars are at work and warrant watching," the report states.
It also noted that ICO funding ($1,250 million so far this year) has surpassed that raised through Angel and Seed venture capital funding for internet-based start-ups, although notes that the total market capitalisation of cryptocurrencies represents just 2% of the value of all mined gold in the world.
The report also highlighted the announcement from the Chicago Board of Exchange that it was working with Gemini Trust Co to allow "cash-settled Bitcoin futures" on its exchange by the end of this year or early in 2018.
Game of Thrones (GoT) maker HBO keeps getting hacked. The latest cyber criminals to get hold of GoT scripts sent the studio a ransom note demanding payment of $6 million in bitcoin.
In an email, HBO agreed to advance to the hackers "a bug bounty payment of $250,000" as soon as it was able to "acquire bitcoin" - HBO characterises its payment as compensation for finding a bug so as not to admit to paying a ransom to hackers.
As we reported earlier this year, corporations - especially banks - are thought to be buying bitcoin to meet current and future ransom demands from cyber criminals.
Our final price driver is more ephemeral and perhaps timeless, which is why it is in last position in order of importance, although could arguably be viewed as a far more significant price booster:
.Chris Burniske, a blockchain expert and formerly tech investment house ARKInvest's crypto lead, tweeted a chart showing the stunning correlation between Google search trend for 'bitcoin' and the price of bitcoin.
As he put it: "An increasing price drives interest in #bitcoin. That interest further drives the price of $BTC. A virtuous Satoshi cycle." Here's the chart.
Whether or not you are sold on the cycle, it points to a likely feedback loop being in play, namely that as more people hear about the spectacular gains of bitcoin, the more people buy the currency - the classic hallmark of an investment mania.
Given that most people have still not heard of bitcoin it is reasonable to suggest that the mania has a way to go before a major implosion takes place, although there will definitely be steep corrections before then.
However, with market watchers talking about price targets of $7,500 next year and $50,000 by 2027 in the case of independent analyst Ronnie Moas, or $100,000 within 10 years according to Saxo Bank analyst Kay Van-Petersen, on the not too far-fetched assumption that bitcoin will account for 10% of total forex daily trading volume by then, there could be several years of gains ahead before the mega-bubble bursts.
From that perspective, there is still plenty of time to build a position, but it may be wise to do so with a trading head by taking profits on a regular basis and being ready to bail, while allocating a certain portion to be held for the long term.
Although the risks are enormous, market liquidity and market-making is much improved since the birth of bitcoin eight years ago.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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