Question
Is there any point of investing into bitcoin after bitcoin boom?
Introduction
The question of investing in the cryptocurrency clearly claims to be a controversy, which is not fully understood today even by the most active players in this market. Presently, there exists a number of arguments both for and against investing capital in Bitcoin after the Boom, which happened in winter of 2018. The boom took place, when Coinbase doubled its number of customers between October 2017 and March 2018 (Nathaniel Popper, August, 2018). Many investors stopped investing in bitcoin as they were disappointed with such sharp decrease in the value after the 6th of of January 2018 (when the boom happened) (Su-Hyun Lee, August 2018). Many have referred to the cryptocurrencies in quite negative ways. For instance, two economists said that the price per coin of the cryptocurrency should only be around $20, instead of the $7,400 mark, which was its noted price at the beginning of August. They stated that in order to equalise its actual price with the current value, its use would have to increase by x1000(Frank Chaparro, July 2018).Kenneth Rogoff said that the only reason for Bitcoin obtaining its value is because of its use in “money laundering and tax evasion”, and added this up by saying that its price is more likely to be $100 rather than $100,000 (William Suberg, March 2018). So, people were buying bitcoin because they either saw its value being intrinsic, or because members of the Blockchain were hoping to sell coins at higher price at a later date (Naeem Aslam, June 2018). However, its price action has pushed many inexperienced investors to sell at staggering losses because they are not prepared to take such risks (The Guardian, January 2018). Therefore, people have lost quite huge sums of investments. For example, one of the young investors from England, who was one of the many risk-takers, has put his savings into bitcoin when its price was at its peak last winter. Now, the invested $23,000 are worth about $4,000 (Nathaniel Popper and Su-Hyun Lee, August 2018). Such disappointing drop in the value of cryptocurrency discouraged investment of some members of the blockchain, however there some investors see a potential for the further growth of Bitcoin.
In this essay, the possible reasons of the Bitcoin of winter 2018 are going to be explained and discussed. These reasons are going to include the sharp reduce in use of Bitcoin in China (Joseph Carey, January 2018), decline in the value of dollar (Stephen Pope, 2018) and the hacks, which the cryptocurrency was subject to in the last year (Jordan French, October 2018).
The best way of investing money, suggested by a number of economists is going to e analysed. This way has appeared to be ‘Buy&Hold’ (Nathan Reiff, July 2017). In particular, the possible risks of the long-term investment in the cryptocurrency are going to be analysed, with the reference to the present situation in the cryptocurrency stock exchange.
There will be suggestions of the possible ways of investing in the cryptocurrency. The first one to be discussed is self-mining of the cryptocurrencies with the help of a computer (Margaret Rouse, October 2013). The second one is purchasing the cryptocurrency, using online services or ATM (coindirect.com). The last one is buying cryptocurrency in the framework of ICO (Bitcoin Magazine, May 2017). These three ways are going to be explained and analysed
The possible arguments for investing in Bitcoin after the boom of 2018, are to be analysed in this essay. The included arguments for investing are the limited emission of BTC coins, its gradual legislation and the appearance of the ‘whales’, who are willing to invest in Bitcoin.
There will be a conclusion offering possible decision on the question of wether there is actually any point of investing into Bitcoin after the boom.
Literature review
Investment is the use of capital with the purpose of obtaining an additional income, by investing in profitable enterprise or by participating in risky projects. Although some investors spent years analysing the market, no one could ever predict what is going to happen tomorrow, so investment is nothing but a gamble. Most of the senior investors prefer obligations, as they are usually the safest option in the market, however many youthful investors choose to speculate, due to the potential vast profit. For some investing in foreign emerging markets might be a good option, for others it can be investing in volatile currencies.
A cryptocurrency is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.[1][2][3] Cryptocurrencies are a kind of alternative currency and digital currency (of which virtual currency is a subset). Cryptocurrencies use decentralized control as opposed to centralised digital currency and central banking systems.
Bitcoin, first released as open-source software in 2009, is generally considered the first decentralized cryptocurrency.[6] Since the release of bitcoin, over 4,000 altcoins (alternative variants of bitcoin, or other cryptocurrencies) have been created.
Bitcoin (₿) is a cryptocurrency, a form of electronic cash. It is a decentralised digital currency without a central bank or single administrator that can be sent from user-to-user on the peer-to-peer bitcoin network without the need for intermediaries (Jennifer Calvery, June 2014).
Bitcoin was introduced in 2008 , after the financial crisis, the point of it is that it is not affected by any governments or central banks, which makes it more substantial during the unsustainable political and even financial situation in the countries (in comparison to other currencies). https://tradingeconomics.com/united-states/currency
Main discussion
Figure 1: Screenshot taken from coindesk.com/price/
The price in the cryptocurrency exchange market has reached its peak of $19,666 on the 17th December 2017 (Sally French, February 2018). To be able to see the sharpness of the boom we it has be considered that have prices started at $998 in 2017 and rose to $13,412.44 on 1 January 2018 (Luke Huntley, July 2018). Compared to January 2018, cryptocurrency prices have decreased quite sharply. The value of all the world's Bitcoins currently stands at $113.5 billion (coinmarketcap.com), however on the day of its peak it was standing at $294 billion (Hasan Chowdhury, September 2018). Such a sharp decline in the value of Bitcoin is supposed to be connected with the growth of Asian stocks due to the rally in Hong Kong and in emerging markets (Joseph Carey, January 2018), as well as with the maximum rate of decline of the US dollar over the last month (Stephen Pope, 2018). The proportion of bitcoin traded in China saw a dramatic decrease: bitcoin traded in renminbi fell from about 90% in September 2017 to less than 1% in June 2018 because people started selling the cryptocurrency (Xinhuanet, 2018) It has to be remembered that the recent strengthening of Bitcoin was largely due to the activity of Chinese investors (Nathan Reiff, April 2017). Eventually, the cryptocurrency exchanges market saw bitcoin's price fluctuating between $11,480 and $5,848 throughout the rest of the first half of 2018 (coindesk.com/price/) Currently, Bitcoins price stands at $6,522.04 (coinmarketcap.com). Bitcoin prices were further negatively impacted by a number of hacks or thefts from cryptocurrency exchange stock market. including thefts from Coincheck in January 2018 (BBC, January 2018), Coinrail and Bithumb in June (Reuters, June 2018), and Bancor in July (Ryan Browne, July 2018). For the first six months of 2018, $761 million worth of cryptocurrencies was reported stolen from exchanges (Gertrude Chavez-Dreyfuss, July 2018). It is to be stated that Bitcoin's price was affected despite the fact that these were different cryptocurrencies, which were stolen, as investors worried about the safety of the value of the cryptocurrency (Daniel Shane, July 2018).
What are the current risks of long-term investment in cryptocurrency?
Presently the most profitable strategy towards investment in bitcoin can be “buy & hold” (Avi Gilburt).
Figure 2: Screenshot taken from bitcoincharts.com
The growth of prices will be promoted not only by the widespread legalisation of cryptocurrencies (EXMO, April 2018) and the growing interest in them in society (Nick Morriss, April 2018) but also by the fact that the emission of many cryptocurrencies is limited algorithmically (Philip Kwak, May 2017). The system was originally conceived so that releasing more than a predetermined number of tokens is impossible (Alex Krüger, September 2017). In case Bitcoin, the “ceiling” is 21 million coins (reddit.com, August 2018).
As can be seen through in the Figure 2, Bitcoin rose from zero to $1,200 in the period from 2012 to the end of 2013, after which, by January 2015, it fell to $160, two years later, by January 5, 2017 it went up to $ 1,200 again, and by January 11, it fell to 765 dollars. This year, the air first pleased investors with growth from $ 8 to $ 400, a week later it collapsed to $13, but soon again exceeded $300 (https://bitcoincharts.com/).
Significant fluctuations in the prices of cryptocurrencies can be provoked by several large transactions, and theses these fluctuations will not necessarily be in the direction of growth. In 2011, one seller, placing only one large bid for the sale of Bitcoin on the MtGox exchange, crashed its price from $17.5 to $0.01 in minutes (Liesl Eichholz, August 2017). It is still not known exactly who it was: someone who intentionally wanted to derail the market, or just a fraudster who wanted to get rid of stolen bitcoins as soon as possible. But the fact remains that the price of this cryptocurrency instantly collapsed 1700 times (Andrew Norry, July 2018). Now the market capitalisation is much larger, and it will be much more difficult to derail it (CointTelegraph, September 2018), but the repetition of such situations are not excluded (Liesl Eichholz, August 2017).
In addition, a period of falling prices of several months or even years can cause a sudden drop in confidence in cryptocurrencies (Anthony Cuthbertson, September 2018). For example, in the summer of 2016, the Bitcoin rate fell by 20% after a large-scale hacker attack on one of the largest Bitcoin exchanges in Hong Kong (Clare Baldwin, August 2016). And for the period from December 2013 to January 2015 (more than a year), bitcoin, against the background of hacker attacks and mass profit-taking, collapsed more than 7.5 times from $1,200 to $160 (Adrian Cheung, 2015).
However, those, who choose cryptocurrencies as an object for long-term investments are also at risk (Bennett Garner, April 2018). It looks very likely that there will be a rise in the value of virtual currencies in the future, there are some predictions that Bitcoin can rise to as high as $50,000 in the calendar year 2018, however it is not guaranteed (Adreas Kaplan, November 2018). For example, if it is assumed that some critical vulnerability is detected in the system of a particular cryptocurrency, or the states begin to massively impose a total ban on the use of this currency, its value may even fall to zero (A Francis, May 2018).
Available ways of investing capital into Bitcoin
Mining – self-mining with the help of a computer, which solves complex cryptographic problems (Margaret Rouse, October 2013). This method requires from a person certain material costs for equipment and electricity, as well as some skills, therefore, not everyone is suitable. Owners of services do not like to mention such “trifles” as fees for the use of electricity, fees for withdrawing money to electronic bills or a very high threshold for the minimum amount for withdrawal. Nevertheless, the profit from this investment depends on such indicators as the complexity of the extraction of cryptocurrency and its exchange rate. (Min Park, January 2018)
Buy a cryptocurrency, using one of the many online services for the exchange of virtual currencies, or even a special cryptocurrency ATM. It is important to pay attention to the fees, which are often charged during the operation, and choose the most profitable option. (coindirect.com)
The Cryptocurrency ATM machines are equipped with biometric scanners to verify users and approve transactions. It can also detect the fingerprints for allowing accessing your virtual money. Further, the scanner can also authenticate the QR code on phones (only those ones with the right instalments and apps) or the code on pre-generated tickets, which will allow to proceed to subsequent processing steps (Techbullion, August 2017).
Purchase cryptocurrency in the framework of ICO – the initial public offering of cryptocurrency, which is used by companies to attract investments. This process has much in common with the IPO (public offering of shares), only in this case the investor invests money not in securities, but in so-called tokens – units of new virtual currency. (Bitcoin Magazine, May 2017)
After ICO, cryptocurrencies, as a rule, begin to bargain on the exchange and their price fluctuates depending on how successful the project is. Possible as a dozen times increase, and a significant drop. Here it is important for the investor to correctly assess the prospects of the project for which funding was raised. In fact, everything happens like a stock market. (Reftoken, May 2017)
This year alone, startups have already attracted more than $1 billion through ICO. According to Smith & Crown research company, this is ten times more than in the whole of 2016. According to the data, 10 million people invested their money in the framework of ICO (Smith and Crown, May 2018). Interestingly, the creators of the ‘ether’ – one of the most popular cryptocurrencies today, have attracted funds to develop the system through ICO, selling the first 60 million tokens for 31.6 thousand bitcoins. Then the price of one ether was 0.3 dollars. As of July 13, 2018, it has reached $200 (BitcoinTalk, February 2018) (icostats.com).
What are the reasons for investing in Bitcoin now?
Despite skepticism coming from experts and global financial market leaders in regards to the volatility of Bitcoin, this cryptocurrency continues to gain momentum (Sam Bourgi, September 2018). With the growth of popularity, a certain demand arises, urging the virtual asset to a higher price. This is the main phenomenon of "digital gold” (Alex Hern, January 2018). However, the increase in quotations cannot continue indefinitely because sooner or later a global correction will occur. (Andrew Griffin, February 2018).
There exists a number of arguments, which support the idea of investing in Bitcoin even after the boom. The growth of cryptocurrency is associated not only with the solution of technical problems. The emergence of interest of many investment companies (Anthony Cuthbertson, July 2018) is one of the arguments stating that the value of Bitcoin will grow, and therefore there is a strong for investing on Bitcoin. According to such experts as Ana Alexandre, investors will bring stability to the market (Cointelegraph, September 2018). Individual countries legalise Bitcoin and accept as payment. Such changes to the legislations can stimulate the growth of the cryptocurrencies.
Limited coin emission.
It is known that the developers laid 21 million BTC in the blockchain. Currently, users hold 16.8 million BTC, and with each month this value increases (David Kariuki, January 2018). BTC contains the 21 million BTC ‘ceiling’ built into the protocol, which was published by Satoshi Nakamoto in 2018. There he has introduced ‘White paper’ as a way of putting digital scarcity to cryptocurrency into place. As a result, the less free coins, the more expensive Bitcoin will be in the long run, which suggests that it may be worth investing in Bitcoin now. With such a ‘ceiling’ being put in place, there are more bitcoins being mined, which means that there is the more scarcity being creating in the market of cryptocurrency exchange stock (Daria Rud, October 2018). Scarcity of anything creates demand, which turns it into being a more valuable thing. Once 21 million bitcoins have been mined, it will become even harder to obtain them, also potentially making each coin more valuable (Nick Marinoff, January 2018).
However, it was suggested that in theory, it is possible to increase Bitcoin’s 21 million BTC fixed supply of Bitcoin via 51 percent (Alyssa Herting, July 2018) or a Sybil attack (William Barlett, July 2018). However, none of these potential manipulations of the Bitcoin supply have been proven to be feasible.
Gradual legalisation.
Despite the criticism of different states, many people governments start understanding the advantages of using cryptocurrency. Today, the blockchain seems to be the technology of the future, which can be introduced and put into various sectors of the economy (Andrew Nelson, February 2018). The process of gradual legalisation can be reflected in removal of Laws on prohibiting the possession or acquisition of cryptos in China. This can reduce financial risks and make Bitcoin an excellent tool for paying for various services. (P.H. Madore, October 2018). However, there are opponents of institutionalisation, such as Spencer Bogart, who believe that in this case getting easy and fast money in the short term will disappear forever (Joel Mathew, May 2018).
The appearance of the "whales of the market."
With the growing popularity of Bitcoin, large players came to the market, investing huge amounts of money in cryptocurrency. People with big money come to the digital ecosystem, the so-called “whales of the market”, and they do not plan to make a profit on mining, their task is to make money on a Bitcoin course (David Hundeiyn, October 2018). With the appearance of such “whales”, the digital ecosystem has a good chance to get $ 1trillion by the end of 2018 of the total capitalisation. With this development, Bitcoin will cost over $ 50,000 (Adreas Kaplan, November 2018).
However, they are able to push the value of the coin, not only up but also down. Nearly 40 percent of the available 21 million BTC are owned by about a 1,000 of investors and may want to sell about half of their digital funds, which will cause huge damages to the value of the cryptocurrency (Mike Hutchings, January 2018) Therefore, one should not be surprised when in a couple of days 1 BTC drops by 20-30% (Jill Treanor, January 2018).
Conclusion
Before investing in digital currencies, the potential financial risks, which may occur in the future are not to be forgotten. If an individual has strongly decided to invest in Bitcoin, he would be recommended not to do it with the last saved capital because it may lead him to serious financial problems. The of rule of putting in only spare capital, due to a lot of risk involvement, applies to all types of investments. The main thing is to avoid panicking if the Tokens market falls because it will lead to investments withdrawal at the lowest value points. The most profitable tactic, according to traders, which should be adapted by investors is to buy Bitcoin and keep it to the last.
An investor might also consider to invest in other cryptocurrencies apart from Bitcoin, because they are just gaining in popularity and their boom is yet to come. Today there are several thousand cryptocurrencies in the world and new ones constantly appear. Among them – about a hundred well-known, which may the alternatives for the investments in Bitcoin. The top 10 cryptocurrencies in terms of capitalisation in early November 2018 included Bitcoin, Ethereum, Ripple, Litecoin, Ethereum Classic, Dash, NEM, IOTA, Monero and BitConnect (coinmarketcap.com).