Bitcoin: will the bauble burst?

| Beauhurst

Category: Tech & innovation

Bitcoin: Will the bauble burst?

Baubles, in fact, are very similar to bubbles: everyone likes them when they are going up, but no-one takes the blame when they come crashing down.

Looking back, Christmas ten years ago was a very different world – no Uber, Instagram, iPad, Deliveroo, Snapchat, Siri, Monzo, Pinterest, AirBnB and perhaps even more remarkably, no Bitcoin.

In 1999 Milton Friedman, Nobel prize winner in economics, stated:

“I think the internet is going to be one of the major forces for reducing the role of the government. The one thing that’s missing but that will soon be developed, is a reliable e-cash”

Nine years later, Bitcoin was developed. Back then, no-one knew what it was. Today, most still don’t.

What is Bitcoin?

Last year a Miami judge ruled that Bitcoin is not money (which makes sense, since it can’t be stored under your mattress).

Cryptocurrency specialist Charles Evans likens it to “poker chips that people are willing to buy from you”.

By definition, Bitcoin is an unregulated digital currency based on blockchain, where each transaction is stored using a distributed ledger on a public and anonymous peer-to-peer network. (If that’s too jargon-heavy, we provide a clear explanation here.)

The bubble

Establishing the kind of bubble in play is nearly as hard as defining Bitcoin. Any bubble is based on an asset’s price dramatically increasing above its intrinsic value, but how to determine price and value is controversial.

Sometimes, it’s best to take a step back and just think about what’s happening. People are buying into Bitcoin because its value is rising, i.e. basing their decision on past returns. This belief is known as “greater fool theory” and is very hot amongst retail investors, explaining why ‘Buy Bitcoin’ has overtaken ‘Buy Gold’ as a Google search:

When we discussed this piece a few weeks ago, Bitcoin had just crossed the $10,000 mark. Since then, its value has continued its trajectory and has nearly doubled as it approaches $20,000. This is partly due to the new ‘Bitcoin futures’ which launched on Wall Street via Cboe Global Exchange.

Futures, in this case crypto futures, are what allow investors to ‘bet’ on the future price of Bitcoin. Someone has found a way to make Bitcoin even more volatile than Bitcoin itself – a scary thought when there’s a quarter trillion dollars at risk if Bitcoin crashes.

It’s not only Bitcoin on the surge, and it’s easy to forget there are other crypto players out there. Litecoin and Ripple have each gained about 400% in the last month, and Ethereum has charged to over $700 this week, taking the cryptocurrency market above the $500bn mark globally (larger than the market capitalisation of most leading bluechips).

Bitcoin brings business

With over $4.9 billion of Bitcoin traded every 24 hours, in over 96 countries (where usage is mostly unrestricted by legislation), some of the UK’s Bitcoin backers are jumping on the gravy sleigh.

For example Wirex, which has created a prepaid Bitcoin debit card, is looking to become the Monzo of blockchain after raising a jolly $3 million in March this year. Our data also found that Coinfloor, three years after their management buyout, received a cash injection of just under £500k this year – a fifth investment round to boost their Bitcoin Exchange. The platform will allow people to buy and sell Bitcoins on an open trading floor, much like the London Stock Exchange which, comparatively, has been as flat as a turkey’s mood in November.

FTSE all share index in 2017

Not everyone’s riding the Bitcoin highs. Satoshipay, who previously relied on Bitcoin’s network to settle ‘nano-payments’, seem to be following a different light after Blue Star Capital backed them with £640k in January this year. After the 2017 rise in popularity, concerns were raised over Bitcoin’s viability for everyday transactions and it seems last month, Satoshipay decided to add Stellar to their distributed ledger wish-list instead.

Stellar is the number 12 cryptocurrency in the world after it jumped 54% in 24 hours over the weekend. You might be noticing a trend here – keeping up to date with cryptocurrencies is like clearing the snow while it’s still snowing.

The gamble

So have we answered the question? Not really. All bubbles will burst, most baubles will break, but ultimately there’s a simple answer to Bitcoin’s rise and why our brave UK businesses are supporting it: Bitcoin was the first mover in a radical new technology, backed by plenty of good old-fashioned hype.

It is likely a matter of time, and money, before we see a crash. So this year of all years please remember, cryptocurrencies aren’t just for Christmas, they’re for life.