There and back again: Decrypting Bitcoin`s 2017 journey from $1000 to $20000

0
2014
7 min read

Lately, Bitcoin has emerged as the most popular topic of discussion amongst colleagues, friends and family. The conversations more or less have a similar theme – filled with inane theories around what Bitcoin is and and the growing fear of missing out on Bitcoin mania. Well to be fair, who would want to miss out on an opportunity to grow their money by more than 1000%. That`s the return posted by Bitcoin since the start of the year. Bitcoin at the time of writing this article is at $15,000 with a marketcap over $250 billion. To put the hype in context, Bitcoin is now valued higher than 90% of companies in S&P 500 list.

Supposedly, invented by an anonymous group or an individual under the alias Satoshi Nakamoto in 2009, Bitcoin has been seen as a digital currency that the internet might not need but one that it deserves. Satoshi`s vision was to create a robust electronic payment system that functions smoothly without a need for a trusted third party. This was achievable with the help of Blockchain, a digital ledger which records transactions in an indelible fashion and is distributed across multiple nodes. This ensured that no transaction is altered or deleted, thus completely eliminating the need for a trusted third party.

For all the excitement around Bitcoin and the increase in interest level towards owning one, the thought of dissecting the roller coaster journey from sub $1000 level to $15,000 this year seemed pretty exciting.

Started year with a bang / Global uncertainties leading to Bitcoin rally – Oct 2016 to Jan 2017

Global uncertainties played a big role in driving Bitcoin`s price and boy 2016 was full of it!  From Brexit to Trump winning the US elections and major economic commotion in terms of Devaluation of China`s Yuan and India`s Demonetization drive all leading to investors seeking shelter in Bitcoin.

The first blip – Jan 2017 to March 2017

Bitcoin phenomena


China as a country has had a major impact in determining Bitcoin`s fate. Early 2017, China contributed to over 80% of Bitcoin transactions indicating the amount of power Chinese traders and investors had in controlling Bitcoin`s price.

However, People’s Bank of China`s closer inspection of the exchanges revealed several irregularities in the transactions and business practices. Which eventually led to officials halting withdrawals using Bitcoin transactions and taking stringent steps towards cryptocurrency exchanges.

Bitcoin sinks

Source – Bloomberg

On the path tobecoming  mainstream and gaining support from Ethereum – Mar 2017 to June 2017

During this phase, we saw the rise of another cryptocurrency, Ethereum, a close digital cousin of Bitcoin. Similar to Bitcoin, Ethereum is also built on top of Blockchain technology allowing it to build a decentralized public network. However, Ethereum’s capabilities extend beyond being a cryptocurrency and help developers to build and deploy any kind of decentralized applications.

Ethereum`s valuation in this period rose from $20 to $375 which was quite beneficial for Bitcoin. As every reference of Ethereum had Bitcoin mentioned as well, whether it was to explain what Ethereum is or how it can take the number 1 cryptocurrency spot in the future. This, coupled with the rise in Blockchain`s popularity, increased Bitcoin`s visibility within USA. The media started observing politicians, celebrities and other prominent personalities speaking on Bitcoin as well.
Bitcoin also received a major boost from Chinese exchanges, wherein withdrawals of the cryptocurrency resumed after nearly a four-month freeze.

All these factors led to Bitcoin crossing an all time high of $2500, up by more than 150% since the start of the year.

The Curious case of Fork – June 2017 to September 2017

The month of July saw the Cryptocurrencies market cap witnessing a sharp decline, with questions being raised on the price volatility and whether Bitcoin`s rally for the year was over? We can of-course now confidently debunk that question.

Though, there hasn’t been any proven rationale behind the decline, one of the reasons seems to be profit booking following months of steep rally in valuations witnessed by Bitcoin.

Another major factor, which might have driven the price collapse may be an unresolved dispute among leading members of the bitcoin community over how to overcome the growing problem of Bitcoin being slow and expensive. With growing usage of Bitcoin, its performance in terms of transaction time has slowed down. Bitcoin`s network due to its limitation in terms of block size could only execute around 7 transactions per second compared to the VISA Network which could do over 1600 transactions.

This also led to transaction fees being increased substantially to $5.00 per transaction and settlement time often taking hours and even days. This eventually put Bitcoin`s flaw in the spotlight when compared with services offered by competitors such as Paypal in terms of cost and transaction time.

Total Market Capitalization

Source – Coinmarketcap

The poor performance of Bitcoin led to investors opting for other cryptocurrencies. The above graph, shows how Bitcoin`s dominance fell substantially compared to other cryptocurrencies such as Ethereum and Litecoin during this time.  

With the core-community still unable to come to a consensus on how to improve the performance and update the software, the prospect of a “fork” was raised.  Fork highlights change in underlying software protocol of Bitcoin to make previous rules valid or invalid. There are two types of blockchain forks – soft fork and hard fork.

Around August, the community announced to go ahead with a hard fork in the form of Bitcoin Cash. This news was surprisingly taken in a positive manner leading to Bitcoin rebounding strongly and reaching new heights of around $4000 in price.

Once bitten, Twice Shy (China) September 2017 to October 2017

China ban ICOs

Source – Zerohedge

The month of September saw another setback for Bitcoin due to measures taken from People`s Bank of China. This time, PBoC banned initial coin offerings (ICO), thus prohibiting the practice of building and selling cryptocurrency to any investors or to finance any startup projects within China.

Based on a  report by National Committee of Experts on Internet Financial Security Technology, Chinese Investors were involved in 2.6 Billion Yuan worth of ICOs in January-June, 2017 reflecting China`s exposure towards Bitcoin.

My Precious (October 2017 to December 2017)

Bitcoin predictions

Source – Manmanroe

During the last quarter Bitcoin`s surge has shocked even hardcore Bitcoin fanatics.  Everything seems to be going right for Bitcoin at the moment.  While at the start of the year China was the major contributor towards the hike in Bitcoin`s valuation, now the momentum seemed to have shifted to a much sensible and responsible market in terms of Japan who have embraced Bitcoin in quite a positive manner.

As you can see from the below graph, Japan now holds more than 50% of transaction compared to USA which is much lesser in size.

Bitcoin charts

Besides Japan, we are also seeing positive developments in country such as Russia and India, who are looking to legalize cryptocurrency usage. Moreover, the level of interests towards Bitcoin from institutional investors is at its peak. All these factors have resulted in Bitcoin to cross the 5 digit mark for the first time in Nov, 2017 and touching an all time high figure of close to $20,000 in December, 2017. Post the record high, Bitcoin has been witnessing a crash and rebound phenomenon in the last two weeks of December. From a record high of $20,000 to $11,000 and now at $15,000, Bitcoin is still a volatile digital currency if one is looking for a quick price appreciation.

Despite the valuation dilemma and the price volatility, one thing is sure: the world is warming up to the idea of cryptocurrencies and even owning one. There are already several predictions being made on how Bitcoin`s astronomical growth is going to continue in 2018. However, Bitcoin needs to overcome several challenges before it can replace the traditional currency and and be widely accepting in banking practices. Besides, the rise of other cryptocurriencies such as Ethereum, LiteCoin or bitcoin cash who are looking to dethrone Bitcoin from the #1 spot, there are broader issues at hand which the Bitcoin community should prioritize such as how to curb the effect of Bitcoin`s mining activities on the environment and on having smoother reforms as well as building regulatory roadmap from countries before people actually start using instead of just looking it as a tool for making a quick buck.

 

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