The value of bitcoin (BTC) soared to over $10,000 today, a 900% increase in value from the start of the year.
Despite significant price dips in July, September and November, bitcoin has been on a consistent and stark upward trend since January, when it was valued at $1,000 per bitcoin.
“Bitcoin has sailed past a number of surprising milestones this year, with the $10,000-mark achieved today the most significant so far. With its rising valuation built on the bitcoin buzz more than real worth, it’s likely that we won’t see bitcoin decline in value until it’s more widely accepted,” says Dennis de Jong, managing director at UFX.com.
“Until bitcoin becomes a commonly used payment source, it’s very possible that it could hit $15,000 and beyond based on its current desirability. Strangely, bitcoin’s undoing is likely to come as the list of merchants accepting the cryptocurrency grows. As it stands, bitcoin holders have few spending options, so, as the number of its users goes up so does its value,” continues de Jong.
“If bitcoin falls into wider circulation, and becomes accepted into more conventional funds and exchanges, we are likely to see a normalisation of its value,” he adds.
Meanwhile, Jordan Hiscott, the chief trader at Ayondo Markets, notes that the demand for bitcoin is so strong right now that in most cases, there are 20 buyers for every one seller.
“For an idea of basis, it began the year at just over $1,000. Can it really be called a currency with 15% fluctuation in a day? If you truly believed in the asset, would you want to pay for goods with the BTC, knowing that had you not bought that coffee with your bitcoin, it would now be worth $10,000,” he says.
Hiscott continues: “These are important questions, that must be answered if the product is to have longevity. Indeed, this also ignores its other use, the mining of bitcoin. Currently it costs around $1,400 BTC in power consumption to successfully compute a unique bitcoin, although every time a bitcoin block is mined (a block makes up 25 bitcoins) the computation difficulty needed to gain a bitcoin is increased. Obviously, with the price at all-time highs, this makes for a lucrative business. Admittedly, this doesn’t include the cost of hardware.”
With such a sudden and sizable increase in the value of bitcoin, inevitably there are questions about whether, and to what extent, a price bubble is being created. The inevitable comparison often drawn up by media reports is to the famous tulip mania in the Netherlands in the 1630s.
However, one source at a digital asset trading firm – speaking to Profit & Loss in October when the price of bitcoin was around $5,600 – warned against applying the metrics used to analyse conventional to cryptocurrencies in order to determine if there is a bubble emerging.
They claimed that cryptocurrency trading occurs in a very asymmetric environment with respect to information, meaning that that there are many market developments taking place that are not necessarily widely known about. By contrast, they said that when looking at a pricing chart for conventional assets, it is assumed that all of the relevant information for that asset is already being priced.
The source also comments: “Given the fractured nature of execution venues for a given digital asset, there are a lot of questions when looking at a pricing chart: what’s the pricing source? How is this chart derived? Methodology questions that many of us wouldn’t ask if it came to a currency cross that we need to ask with digital assets.”
At a recent event hosted by Profit & Loss in Hong Kong, one speaker on a panel looking at the mainstream appeal of cryptocurrencies even insisted that a massive price correction in bitcoin would not necessarily reduce the appeal of this asset to institutional traders.
“If bitcoin fell 90% in a day, everyone who is an institutional trader would still trade it, mainly because their other options are trading equities, FX, commodities that just go up very slowly. It’s very hard to make money in a market with no volatility, so the reason why people trade these things is because they’re truly volatile and now the liquidity profile has changed a lot so that it’s much better than it was three years ago,” they said.