Bitcoins’ price has doubled within a period of less than one year. Coming from 1,000$ per bitcoin in January 2017, it is now worth a bit more than 2,000$. But, what are bitcoins? How did it all start, and when and why is it used? These are the questions I’ll have a look at today.
The starting path of bitcoin is a bit shady. The talk about bitcoin started in 2008 with Neal Kin, Vladimir Osman, and Charles Bry. They applied for an encryption patent application. All of them are denying any connection to the bitcoin. However, they also registered bitcoin.org, through an anonymous platform. The actual creator of bitcoin is Satoshi Nakamoto. It is believed to be a pseudonym for one person, or maybe a group of people, who are responsible for the creation of the most of the software. So it is still not clear who actually created this digital currency. This secrecy and an unclear view of why anyone actually needs this currency led to a big hype around bitcoin. However, bitcoin was still not popular during the first years and it retailed for less than a U.S. dollar until the beginning of 2011, where they reached parity.
Why would anyone actually purchase bitcoins?
Of course, there are stories about people who bought several bitcoins in the inception of the currency for super cheap, so now they can make a pretty big profit by reselling them—so it seems that bitcoins can be an investment on their own. The trading process is a bit similar to Forex (a global market for currency exchange). In Forex, traders play on exchange rates between the currencies. They explore and predict the future changes between two currencies and try to make profits. The riskier and the more volatile the currency is, the larger the profit. Bitcoin trading is similar in that people exchange the cryptocurrency for another currency, and it is much riskier than Forex trading due to its high volatility. The main difference between the two is how supply and demand are determined. Other currencies are controlled by the government and the demand for them is uniform. Bitcoin’s demand depends on other factors like public adoption and confidence. The supply of bitcoin is also different: Bitcoins are generated through a computerized mechanism, which makes just ‘enough’ bitcoins, meaning that there is a stable and necessary supply in the market. Other currencies’ supplies are determined by their respective central banks. Although there are obvious similarities between Forex and bitcoin, they are still very different in their mechanisms.
What are other uses there for bitcoins?
Initially, this digital currency was designed to operate independently from any regulatory structure to facilitate almost fully anonymous transactions locally and internationally. Also, the bitcoin transactions were not covered by any legal or regulatory structures until recently, when countries started accepting them as legal payment methods. Basically, bitcoins aimed at allowing people abandoning the system, going ‘off-books’ This might be useful in offshore or any other sort of illegal money exchange transactions. At the same time, it makes the transactions a bit more dangerous, as there is no basic consumer protection that is present in other transactions.
Starting from 2014 more and more companies started accepting bitcoins as a payment method (e.g. Steam, PayPal, Microsoft, Dell). As well as that, several U.S. casinos started accepting this digital currency. Another field that started accepting bitcoins is the nonprofit sector: Charity companies like Greenpeace and several U.S. political candidates accept bitcoins as donations.
Why is the price for bitcoins rising so rapidly?
This is the question that interests a lot of people. After doing my research, I found several interesting details and events that contribute to bitcoin’s rise in value. They are not fully answering this question, but they do give some understanding of why the value if the digital currency increases.
One of such events was the 2012-2013 Cypriot financial crisis. People wanted to secure their savings and protect themselves from currency fluctuations. Purchasing bitcoins was one of the ways to do it.
A similar situation happened in Greece, where the overall interest and purchasing of bitcoins has increased due to the recent debt crisis. Having a digital asset, which is not correlated to your home currency, seems to be a secure method of protecting yourself from unpredictable currency fluctuations during the period of crisis.
Among the more recent reasons can be an increase in interest and awareness of people about digital currencies. People are trying to find analogs to bitcoin, so they start purchasing other cryptocurrencies. It drives the whole market demand up, which leads to an overall price increase.
Also, some countries are legalizing bitcoins as a method of payment. For example, Japan. In other countries, like Russia and India, there is some debate going on whether or not bitcoin should be legalized, but in both countries, the answer moves towards a yes.
Bitcoin for me was first a very distant and unclear world. However, if you just go into a little bit more detail it becomes much clearer. I am not an investor or a professional economist to predict the future of bitcoin, but it seems to me that it is indeed becoming a more and more popular version of currency and who knows, maybe in several years, a number of special bitcoin ATMs all over the world will rise from 1200 (https://coinatmradar.com) to an enormous number.