The bullish market of bitcoin may be here to stay. But with bitcoin, it’s never easy to speculate.
Less than two weeks ago, bitcoin prices once again hit the five-figure mark. After the media frenzied over the surge in 2017, cautioning buyers that it was unlikely to ever recover, that old rascal bitcoin is at it again.
While bitcoin has never truly been considered a “sound investment”, many potential traders are flocking to the market in hopes that the wild oscillations could work in their favor. However, without a clear idea of why the market behaves as it does, people who are new to the bitcoin game should probably invest in not only a decent trading platform, one like Bitvavo, that helps familiarize them with bitcoin and its markets, but should also consider doing some heavy reading.
The bitcoin market isn’t necessarily easy to understand, perhaps even more so for seasoned investors in standard markets. As the gaping differences in market structure and valuation mean that standardized trading strategies may not be the best approach anymore.
The Pricing of Bitcoin
Many sources will equate bitcoin with gold. For all intents and purposes, this is actually a pretty great allegory. Bitcoin, much like gold, can’t just be arbitrarily produced. There is a finite amount of it in existence. What makes bitcoin perhaps a bit more compelling than gold, however, is that we know exactly how many bitcoins exist. Not only that, but we also know the rate at which they’ll be released and the date that the market will cap.
In January of 2009, bitcoin software was released. Networks were created, and Satoshi Nakamoto (a pseudonym) was penned as its inventor. In the early market, 21 billion bitcoins were created, but left unreleased. As the technology that logs bitcoin transactions (blockchain) is used, bitcoins are released as awards to those who solve the complicated mathematical algorithms that create the logs (miners).
The amount of coins that are awarded to each miner is halved every four years. If the math of this is already making your head spin, don’t worry, you’re not alone. So over the course of 100 years, 21 million bitcoins will be released for trade. Seems simple enough to make conjectures about pricing bitcoin, however it’s not that easy.
The Availability of Bitcoin
Experts estimate that of the 21 million bitcoins in existence, 3.79 million of them have already been lost forever. Because of their relatively unpopular and unknown existence in the early days, bitcoin didn’t become worth having for almost five years. Thousands were left forgotten or accidentally destroyed.
On top of that, an estimated 1 million were stolen, and are effectively out of circulation for the time being. The market is also dominated by “whale investors”, meaning that 5 million coins are held hostage by a few savvy early investors. So of the 17 million bitcoins that should be available, only about 7 million are actually available for trade and speculation.
This makes them incredibly rare. Which generally means they are pretty highly coveted. So knowing this, the market should be fairly easy to predict? Right? No. Sorry.
The Oscillation of Bitcoin
One of the main reasons the market is so incredibly volatile is that it doesn’t fall under the same jurisdictions and practices that regular markets do. There is no centralized power that helps to inflate prices or demand, which is a good thing. However, on the flip side, there is no centralized authority that keeps whale investors from manipulating the market to suit their own needs.
Another reason is the very fact that bitcoin is decentralized and anonymous. Meaning that it can be used as a hedge to circumvent many of the trade wars that are happening right now. As the US-China trade war rages on, and currency values for the Yuen and Dollar fluctuate, bitcoin value stays strong. Showing a negative correlation to the equity markets. Making it a much more reliable stash for many investors that are concerned with the state of global markets.
Not to mention that countries like China and Australia are starting to use bitcoin as a recognized form of payment. Making it easier to use and more widely adaptable as a currency- which plainly suggests that more average people want to have it as a currency option available to them. Specifically, because it’s not manipulated in price the same way standardized currencies are. Many investors find bitcoin’s decentralized and anonymous holding system (bit wallet) much more enticing than a standard bank account as well- as there are no fees to contend with. In fact, some companies are now willing to pay their employees in bitcoin. Increasing exchange rate until those bitcoins are sold for any one specific currency. With wider acceptance and usage of bitcoin, we can expect to see an even more volatile pricing structure.