Bitcoin, a highly volatile cryptocurrency
The nature of bitcoin, independent of the decisions of economic organizations and governments, explains the behavior of its price and opens the debate on whether it could become a refuge value.
Throughout this year we have seen how geopolitical risks and palpable uncertainty on the world stage have had significant effects on the main legal tender currencies. The pound hit its lowest level against the euro since 2009 in August on the shaky political landscape in the UK and the value of the US dollar has suffered from doubts generated by Trump-era policies and the tensions of the North Korean conflict. Markets are sensitive and investors are currently looking to protect their assets.
In scenarios like this, the other side of the coin has a digital name: bitcoin , which seems to be reinforced. In August, the value of the world’s best-known digital currency soared to the edge of $4,500 and in October it has broken through the $6,000 barrier , reaching its all-time high.
In fact, bitcoin has accumulated in the last two years a rebound of close to 2,400% and only so far in 2017 its value has multiplied by six (in January a bitcoin was bought for about 900 dollars).
But what is bitcoin and how does its price work? This digital currency is based on a protocol created in 2009 by the expert (or group of them) behind the pseudonym Satoshi Nakamoto . The main characteristic of cryptocurrency is its decentralization: it is independent of any central bank or government , since, unlike fiat currencies, bitcoin is not issued by decision of any official entity. It is a monetary system in which control is carried out, indirectly through their transactions, by the users themselves.
In this way, the market itself —supply and demand— is the one that determines its exchange rate and, therefore, its price . In addition, the emission is limited, since the system only allows a maximum of 21 million bitcoins to be generated .
The lack of regulation and oversight by official bodies has made bitcoin attractive to some investors. However, these characteristics are also the cause of its extremely volatile price . In fact, since its inception there have been several occasions when its value has skyrocketed and then suffered sudden drops, for example during the Cyprus financial crisis in 2013.
The digital gold?
Due to its characteristics —durable, palpable, limited and valuable in itself— gold has proven throughout history to be the refuge value par excellence . Investing in the golden metal has always been synonymous with security and protection of capital, especially in times of political and economic fluctuations.
Defenders of bitcoin have come to baptize it as “digital gold” due to the fact that its issuance is limited and because its price reacts in the same way as traditional safe haven values in times of geopolitical tensions. Even some Wall Street expert has opted for this comparison.
Why does the price of cryptocurrencies vary so much?
One of the main characteristics of cryptocurrencies is their great volatility, which can cause their price to fall by more than 50% in a few days or, on the contrary, increase by 12,000% in just a few months. The balance between supply and demand, its usefulness, sentiment, speculative practices and the so-called ‘whales’ are some of the factors that condition its fluctuation.
Recently, Goldman Sachs was on the other side of the debate: “ cryptocurrencies like bitcoin are not the new gold” , it warned investors. Its analysts assure that precious metals continue to be the best safe value and recall that, despite its popularity, the average volatility of bitcoin has been seven times that of gold in 2017. In short, given the unstoppable pace of cryptocurrency, there is experts who consider that there is currently a “bubble”, while others believe that its value will continue to increase.
In any case, the truth is that its acceptance is advancing : for example, in September a London real estate company announced that it would allow its tenants to pay rent in bitcoins, while in Japan it is a legal means of payment. The last case of “traditional” economy that recognizes the value of bitcoin as an asset is that of the CME Group (Chicago Mercantile Exchange) . The manager of the world’s largest derivatives and futures market has announced that it will bring bitcoin futures to market before the end of the year “due to growing customer interest in cryptocurrency markets.” This decision by CME represents a strong push for virtual currencies as a financial asset.