Bitcoin reached highs of $20,000 internationally yesterday as its meteoric rise continues. Average prices crossed the $16,000 mark on the day.
It still boggles the mind that we started this year at about $1000 and in eleven odd months the price is reaching twenty thousand dollar highs. That is growth unheard of in investment circles. That is 1900% or 1600% return in less than a year.
Why the sudden growth though? It hasn’t always been like this. It took the cryptocurrency about 7 years to get to a thousand. Then in less than a year it grows that rapidly to reach $20,000. What gives?
This state of affairs baffles the experts who insist that the fact that Bitcoin has no intrinsic value speaks to its valuation being speculative and so is a bubble and bubbles eventually burst. The bubble is yet to burst though and in the meantime we need to understand what is going on.
No one really knows why the price is rising like it is. Some have claimed it is because of new interest from investors in Japan and South Korea. Some claim it is because institutional investors are starting to invest in Bitcoin.
Of course the experts telling us that it is because of the involvement of institutional investors represent institutional investors themselves so it might be a pride thing. Just had to let that out.
It is true that hedge funds have been set up to deal exclusively in cryptocurrencies like Bitcoin. The New York Times reports that the number of such hedge funds have grown from 30 to 130 this year alone.
These hedge funds are pouring in millions into Bitcoin and driving the price up or at least contributing to the price increase. Some traditional investors are still skeptical about the whole cryptocurrency thing though.
Bitcoin itself does not have an intrinsic value and you cannot convince an old school investor to invest in such a commodity. The Chief Executive of JPMorgan Chase, Jamie Dimon, is on record saying he won’t let his bank trade Bitcoin.
What you can convince people like Dimon to invest in however are Bitcoin futures. Futures can be used to hedge or speculate on the price movement of the underlying asset. So investors can speculate on the price movement of a cryptocurrency by going long or short using futures.
In the US, some exchanges have already been given permission to deal in Bitcoin contracts. We are not talking Bitcoin exchanges like Golix here but exchanges similar to the Zimbabwe Stock Exchange. More exchanges are set to deal in Bitcoin contracts in the US and rumours are that NASDAQ is set to trade in such Bitcoin contracts.
So some think this whole development is the biggest reason Bitcoin prices have jumped like they did.
Then there is the Lightning Protocol.
It might not be a coincidence that Bitcoin reached its record highs on the day there was a beta test of the Lightning Network.
Lightning is a decentralized network using smart contract functionality in the blockchain to enable instant payments across a network of participants. We touched on what smart contracts are when we discussed CryptoKitties, go read what that is all about here.
So by moving some transactions from the main blockchain, Lightning eases the congestion on Bitcoin transactions.
Lightning Network says the protocol brings the following benefits to Bitcoin trading:
Instant Payments. Lightning-fast blockchain payments without worrying about block confirmation times. Security is enforced by blockchain smart-contracts without creating a on-blockchain transaction for individual payments. Payment speed measured in milliseconds to seconds.
Scalability. Capable of millions to billions of transactions per second across the network. Capacity blows away legacy payment rails by many orders of magnitude. Attaching payment per action/click is now possible without custodians.
Low Cost. By transacting and settling off-blockchain, the Lightning Network allows for exceptionally low fees, which allows for emerging use cases such as instant micropayments.
Cross Blockchains. Cross-chain atomic swaps can occur off-chain instantly with heterogeneous blockchain consensus rules. So long as the chains can support the same cryptographic hash function, it is possible to make transactions across blockchains without trust in 3rd party custodians.
So these might be the reasons for the sudden spike in Bitcoin prices across the world. We will keep tracking Bitcoin’s progress.