The Rise and Fall of Bitcoin

The Rise and Fall of Bitcoin

Bitcoin created many millionaires over a short period of time. But, the boom seems to be over now. The Cryptocurrency has seen a massive fall in prices since its peak price of over $19,000 last year. Currently, it is trading much below the $10,000 mark. Also, many investors are speculating that the price could touchdown to zero. Other Cryptocurrencies have also experienced a steep fall in prices, as many investors are losing confidence and pulling out of the market.Well, what goes up, must come down. And investors in Bitcoin are learning this old truth, probably the hard way!

What is Bitcoin?

In case you are wondering, let us start by telling you about Bitcoin.

Bitcoin is a cryptocurrency invented by Satoshi Nakamoto in 2009. The Decentralised digital currency uses rules of cryptography for regulation and generation of units of currency.

To explain it further, Bitcoins are like virtual coins that are ‘self-controlled’ for their value. The Bitcoins owned by you are like gold coins. They have intrinsic value and can be used to buy goods and services online. Alternately, you can store them and hope for their value to increase over the years.

Bitcoins are stored in personal wallets – referring to a personal space on your computer drive, Smartphone or cloud. The virtual currency is traded from one personal wallet to another. No bank involvement is required for movement.

The Bitcoin Craze

Over the past few years, Bitcoin emerged as an unbeatable investment option. The reason behind such a phenomenon is rooted in the fact that Bitcoins, digitally mined by programmers around the world, are limited in number. Only a finite number of Bitcoins can be mined before they get exhausted. The limited supply of Bitcoins caused their prices to soar at incredible levels.

The price of Bitcoin at any time is a result of the trading that happens on cryptocurrency exchanges. Thus, as previously said, the price of a Bitcoin is closely linked to the law of demand and supply. As a result, when the demand for Bitcoin increases, the price increases. And, when the demand falls, the price falls. Besides, as there are only a limited number of Bitcoins in the relatively small market, the price of the Bitcoin is quite volatile because the demand is not constant.

The Future of Bitcoin

The rise of Bitcoin and other cryptocurrencies has been compared to a bubble wherein prices have risen irrationally, without any intrinsic value in the asset. However, those who have faith in the cryptocurrency consider the steep price crash to be a natural correction. Some also believe this to be a good time to buy Bitcoin cheaply before the prices hike again.

Talking about investment, some experts believe that Bitcoin cannot be valued. Bitcoin is closer to being a currency than an asset, which means you can trade it but not invest in it. “I will argue that Bitcoin is not an asset, but a currency, and as such, you cannot value it or invest in it. You can only price it and trade it,” says Aswath Damodaran, a professor of finance at the NYU’s Stern School of Business. Mr Damodaran has also said that Bitcoin “is failing as a currency and succeeding as a speculative investment.”

For example, what is the defining feature of a currency? It has an intrinsic value and is a medium of exchange. But, cryptocurrencies seem to fail here. While Bitcoin can be used as a medium of exchange in limited dealings, it is too volatile to be a store of value.

Mr Damodaran cites a very simple example to explain this. “If I put 100 Bitcoins in my pocket and leave my house with just that in my pocket, my guess is I will spend the day hungry and thirsty,” he explains. “Also it is not a great store of value because I am not sure that if I put a Bitcoin in my pocket and later take it out, if anybody will take it.”

Regulatory crackdown on Bitcoin

Recently, South Korean government that decided to ban all Bitcoin operations within the country. The ban isn’t operative yet, but it shows the distrust of governments in cryptocurrencies. Closer home, the Reserve Bank of India barred banks and financial institutions from dealing with virtual currencies including Bitcoins.

Even corporate giants like Microsoft & Stripe have stopped accepting Bitcoin deposits.. Long transaction times and high fees seem to be the reason behind corporates reversing their stand on Bitcoin payments. Yet, the move comes at a time when Bitcoin prices are already falling, leading to further speculation about the value of the cryptocurrency.

Bitcoin and other cryptocurrencies have been stuck in a downtrend since December last year. Many believe there isn’t much hope for an upward spiral. That is, unless the sentiments of the investors suddenly change in favour of cryptocurrencies once again.

But, is that likely to happen?

If the reaction of national governments to Bitcoin is anything go by, the answer is ‘No’.

Investing in Bitcoin

If you are ready for investing, the Bitcoin market might look like an attractive one. But, be very cautious (specially if you are new to investing) as the risk outweighs its return potential.

Well, the future of Bitcoin remains to be seen. Many Bitcoin enthusiasts do believe their fortunes would change for better, soon. Yet, in reality, many investors are turning their backs to the cryptocurrency. The focus is returning to conventional investments into stocks and mutual funds that have given lucrative returns over the years and created ‘real’ billionaires whose wealth is not tied to a volatile digital currency.

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About Author
Rahul Pahuja

Rahul Pahuja

Rahul Pahuja is the Founder and CEO of TradeGyani - India’s first social network for stock market that enables retail investors to learn from other passionate investors, traders & celebrity advisors to make informed investment decisions. Before starting TradeGyani, Rahul served as a senior vice president at Moody’s Analytics, and played a major role in building the captive unit in Gurugram and Bangalore. Passionate about cricket, volleyball and basketball, Rahul brings a sportsman’s energy and perseverance to everything he does. Rahul holds MBA from Purdue University, PG Diploma in International Business from Amity University & bachelor’s in computers from B.U.

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