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Bitcoin Exchange Rate Is at Its Highest

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Written By: Miles Pearson – Forex Focus

Bitcoin is a cryptocurrency that was created by Satoshi Nakamoto in 2008, thanks to a peer-to-peer (P2P) electronic cash system. This currency is traded on a specific blockchain system, separate from all banking systems. Central banks do not create monetary policies for or monitor the flows of this currency, as they do for every other currency. Bitcoin appeared in the middle of the 2008 financial crisis as a possible answer for individuals to protect themselves from the highly risky investments of banks and pension funds and from the devaluation of their national currencies, and as an answer to the confidence crisis in financial institutions.

How is the bitcoin rate fluctuating?

Unlike other currencies, national policies and/or economies do not drive the bitcoin exchange rate, which stays in its own ecosystem, outside the reach of any monetary policy.

While the strength of a traditional currency depends on the wealth of its economy, bitcoin’s fluctuations are dependent on only two traditional indicators: supply and demand.

  • On the supply side, until now bitcoins have been created according to demand, but within a strict total limit of 21 million bitcoins issued, according to the guidelines set at its creation. This threshold of 21 million is expected to be reached in 2140. Today, four Chinese companies (F2Pool, AntPool, BTCC Pool, BW Pool) create 70 percent of new bitcoins, reflecting the concentration of this sector. The technological investments needed to become an issuing “mining company” are costly and push economies of scale.

Another feature of the bitcoin market progressively reduces the issuance rhythm: that is, the division by two of the mining premium. The division of the mining premium, which takes place every four years, is the operation that reduces the supply of bitcoin, the last of which took place on July 9, 2016. Before that date, mining companies were receiving 25 bitcoins for their participation in the issuance of bitcoin. Since that date, they are receiving only half of that, 12.5 bitcoins. The more the bitcoin rate goes up, the less new bitcoin mining groups need to sell on the markets to finance their operations, which encourages the rate increase. And the less they issue, the more the value of existing bitcoin increases.

  • On the demand side, the real motivation of buyers can be found firstly in the desire for the protection that prevailed during the creation of the cryptocurrency. Buyers are protected by the use of pseudonyms; no hackers have been able to enter the system; and no government or central bank can influence the rates and trades on the system.

Hence, one can see how some recent events have led to bitcoin-rate increases: 

  • in 2013, the Cypriot financial crisis,
  • in November 2016, the Indian government’s decision to retrieve notes, creating a financial confidence crisis,
  • at the end of 2016, the Chinese yuan depreciation,
  • at the beginning of 2017, the Chinese restrictions on foreign-exchange transfers,
  • in 2016, the Venezuelan monetary crisis (inflation at 475 percent, cancellation of 100-bolivar notes).

Bitcoin is now traded in 85 countries. And although some countries have forbidden any trade in bitcoin (Russia, Thailand and China—the latter for its banking system and Alibaba), and money- laundering accusations are continuously raised against it, one can see that the cryptocurrency rate rises each time people fear a big financial crisis and feel less safe in the traditional monetary system.

One of the special features of the bitcoin market is its volatility. The price has risen by nearly 530 percent since the beginning of 2016 and is increasingly close to the symbolic price of $3,000. This interest is largely due to the exchange-control policy in China, as the overwhelming majority (90 percent) of trade in the bitcoin market comes from China. Similarly, bitcoin’s course also takes advantage of the snowball effect: traders are seduced by quick gain.

What does the future look like?

Today’s bitcoin-rate evolution is incredible, as the graph below shows. The level of $3,000 has even been reached recently.

Of course, no regulation can stabilize the rate. The volatility in such a condition, with supply limited but not demand, must be understood as very high and very risky. Bitcoin hit a record high at $3,000 on June 11 before falling 27 percent a few days later.

The moment for taking profits could arise. But future bitcoin value predictions remain optimistic. They are based on the estimated bitcoin market share out of the total foreign-exchange market ($5 trillion). The cryptocurrency market share could achieve, for instance, 10 percent, or $500 billion. Then some specialists, such as Saxo Bank analyst Kay Van-Petersen, think that bitcoin could represent in 10 years 35 percent of the cryptocurrency market, meaning $175 billion. Kay Van-Petersen, for instance, estimates the bitcoin circulation number in 10 years at 17 million bitcoins (to achieve the 21 million limit in 2140), resulting in a bitcoin value slightly above $10,000.

Of course, all of this is based on market-share assumptions that are difficult to anticipate, but also on other assumptions that are equally important (including political ones). But who knows?

 

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1 comment

CrypticMal September 18, 2017 - 3:52 pm

With the Chinese looking to, in effect, ban Bitcoin it would not surprise me to see the value drop down to $1000 before the end of the year.

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