Cryptocurrency bitcoin soared to US$16,777 on Thursday, reaching a market capitalization of $274 billion, according to Bloomberg’s composite of exchanges. That was up from just $10,000 last week, and up some 1,500 percent from the beginning of 2017.
The latest price increases have come as bitcoin increasingly has been recognized as a legitimate form of currency.
The Commodity Futures Trading Commission (CFTC) last week announced that it would allow the trading of bitcoin derivatives on the CME Group and CBOE Global Market exchanges.
The CFTC’s move makes it easier for investors to buy and sell bitcoins at a future date at a pre-agreed rate.
However, investors should be aware of a potentially high level of volatility with the currency, the agency warned.
Bitcoin was introduced as a decentralized digital currency in early 2009. Its system works without a central repository or single administrator; transactions between users take place directly through the use of a cryptography. Transactions are verified on network nodes and recorded in a public ledger, or blockchain.
Bitcoin’s exact origin is still somewhat mysterious. It was invented by an unknown person, known only as “Satoshi Nakamoto,” and released as an open source platform.
A True Market Cap
Bitcoins are generated via digital mining, which utilizes complex computer algorithms. Each and every bitcoin is tracked via the network’s shared transaction ledger. In total, there can be only 21 million bitcoins in the entire world. As of Dec. 5, 16.7 million have been mined.
Even with each bitcoin valued at roughly $16,000, the currency represents just a small drop in the bucket of the world’s wealth.
“We have $200 trillion in the world right now in stocks, cash, bonds and gold — and all of it is overvalued,” said Ronnie Moas, founder of Standpoint Research.
That is roughly $25,000 for every man, woman and child in the world.
“If 2 percent of that ends up in a cryptocurrency, that is just $4 trillion of the total world wealth,” Moas told the E-Commerce Times.
Given that there is a finite limit to the amount of bitcoin there can be in the world, the currency is structured to have a true cap. Unlike a national currency, such as the United States dollar, it will be impossible to create more.
“We don’t know how much gold is still in the ground, but we know how much bitcoin there is, and there is no way to turn on the printing press,” noted Moas. “The dollar loses value every time the United States prints more, but bitcoin has a set amount. So it is acting like a currency is supposed to act.”
Highs and Lows
Except for times of great of upheaval, traditional currencies don’t tend to see such massive gains in such a short period of time. Bitcoin’s rise is being driven a number of factors.
For one, bitcoin’s sudden increase is a response to the rash of new initial coin offerings (ICOs), suggested Mark Nunnikhoven, VP of cloud research for Trend Micro.
The fact that bitcoin has barriers in place to ensure that it won’t face hyperinflation or sudden devaluation also has made it appealing to savvy investors.
“Blockchain technology is mathematically sound and provides the basis for the latest round of cryptocurrencies, and as with most technology innovations, this has lowered the barrier to entry,” Nunnikhoven told the E-Commerce Times.
“As the system behind Bitcoin is transparent and moderated, basic economics kick in around supply and demand,” he added.
The recent spike in value could be seen as a reflection of trust in the system, just as much as a lack of trust in the various ICOs popping up everywhere.
Confidence in the Currency
Bitcoin’s meteoric rise is more akin to that of hot stocks, though, which can see quick spikes — as well as dips, or even crashes — in price. That is why some businesses will not take bitcoin as a means of payment.
The online gaming service Steam, for example, has announced that bitcoin no longer will be accepted.
“It’s understandable that some services would drop support for bitcoin due to this volatility, depending on the flexibility of their internal systems,” said Nunnikhoven.
Volatility is a significant concern for businesses.
“The logistics of accounting for the value received/paid can be difficult when the value of a bitcoin doubles overnight,” Nunnikhoven explained. “Companies that conduct transactions in bitcoin should evaluate their ability to handle rapid fluctuations in the value of the currency and decide whether or not they can continue to accept this form of currency.”
Currency of the Future
The eventual limit of 21 million bitcoins in the entire world could allow the currency fluctuations to stabilize, but that ceiling has not yet been reached.
For perspective, bitcoin’s present worth exceeds that of some giant multinational companies, including IBM, McDonald’s and Disney, for example.
As for bitcoin’s top future value, “$150,000 is my estimate and that is conservative, as some others have forecast up to $1 million,” suggested Moas.
“Right now, bitcoin is a top 20 currency and it is at the same level as China’s currency or gold,” he pointed out. “Right now, it isn’t even close to how high it could go.”