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Bitcoin’s price topped $ 20,000 for the first time in history on Wednesday and hit an all-time high on Thursday at $ 23,655, which has risen nearly 220 percent this year.
What is bitcoin?
Bitcoin is an open source digital currency from which a strictly defined amount can be mined. Its maximum inventory is 21 million, and until the publication of our article 2.43 million bitcoins can be mined. Bitcoin is not under the control of any central bank, the decentralized software system cannot be manipulated, it guarantees immediate and practically free cash flow between users. On average, miners find one bitcoin every 10 minutes, according to which the last pieces of the 21 million bitcoins that represent the ceiling would be found in 2140. But based on the current upward trend in mining capacity, analysts set the date in which 99.9 percent of all bitcoin will be mined between 2040 and 2050.
Open source digital money was issued in January 2009 by a stranger and it really hit in April 2017. At the time, around $ 1,000 could still be traded, but by the end of the year it was approaching the 20,000 mark, then it started to decline in January and weakened to $ 3,000 in one year. Many have already abandoned it, but bought it back last summer for about $ 10,000.
It was below $ 5,000 in March this year and then spiked again, breaking the peak, with some analysts even recently predicting that bitcoin will not be able to break the psychological limit of $ 20,000.
We turned to blockchain and bitcoin experts to find out what was behind the unusual appreciation and what the dangers could be.
Just 6 bitcoins are generated every 10 minutes
“There are several components to the fact that Bitcoin has just been skyrocketed,” Barnabás Debreczeni, director of MrCoin, Hungary’s first Bitcoin ATM, told Index. He said that the currency, on the one hand, shows a cyclical movement similar to that of values. Its production rate is cut in half every four years, which means that its inflation rate is cut in half every four years.
“The security of the system is guaranteed by the miners, so the system itself issues them a gift of bitcoin. Currently, this is 6.25 bitcoins per 10 minutes, which benefits most those who have invested more energy in the operation of the network, that is, the most active miners.
This reward is cut in half every 4 years, and that’s when the exchange rate skyrockets, we see it now.
Then comes a period of consolidation, a rise in the exchange rate, then a mania, a bubble, and then another recession, so it looks like the cycle ”, explains Barnabás Debreczeni, the market logic of the rise of bitcoin.
Many hoped that if a crisis occurred, bitcoin could act as a kind of currency on the run: Tamás Czeglédi, co-founder of Blockchaineum, told Index that the exchange rate of bitcoin was supposed to rise in February-March.
However, this did not happen, again, bitcoin did not behave as many would have expected
Said the blockchain expert. They expected the exchange rate to start rising one day, but until now they had to wait the last few years, even though the technology itself was starting to become more and more accepted. Czeglédi drew attention to the fact that leading economists have already highlighted the deflationary effect of bitcoin: due to the fact that its production is guaranteed to be finite, it is possible to calculate how much bitcoin will be on the market in total.
Another reason for the launch is the appearance of institutional players who started investing in bitcoin in 2020 with steam power.
According to a 2018 survey, 30 out of 100 people have heard of bitcoin and two out of 100 people own bitcoin. In 2017, this cryptocurrency was still characterized by retail and small investor interest, but in 2020 serious companies will buy bitcoin.
– a board member of the Hungarian Bitcoin Association indicated to the Index. Here are some examples:
- PayPal has also entered the cryptocurrency trade;
- software company MicroStrategy bought $ 500 million in reserves for $ 425 million in September this year and then issued another $ 650 million in bonds that sold out in one day, as well as converting it to bitcoin, almost turning it into an ETF (Exchange Traded Fund) of bitcoin;
- Square fintech has invested 50 million dollars in bitcoin;
- However, Grayscale owns the most, with a total of almost half a million bitcoins in the hedge fund, they are the biggest fish on the market.
Listed companies have listed a total of more than 953,000 bitcoins; the full list can be found here.
But why did Bitcoin just get started?
According to Czeglédi, there really hasn’t been any news in recent days that could have strengthened the exchange rate, but it also drew attention to the purchase of MicroStrategy: the head of the company created a de facto bitcoin ETF of his own company, So whoever buys their shares also bets a bit on bitcoin.
It could be a new topic behind the current rally, but it is also a multi-month story.
Added. He believes that now there may be more balloons in the real economy, he says that an increase in the price of bitcoin is more guaranteed in the long term.
Everybody come in
Bitcoin has now become a legitimate investment, 2020 was about tackling large institutions building their infrastructure at the speed of light. We are talking about hundreds of companies, bitcoin is in the portfolio of all of them, it is recommended to customers – said Barnabás Debreczeni.
According to the expert, the fact that financial institutions have paid very low interest rates for investments in the developed world in recent years, or nothing at all, is not a negligible aspect of the coin toss. Financial institutions seek growth with an incessant amount of money printing, with a quarter of the US dollar printed, for example, this year.
And the Covid epidemic was just oil on fire
Thus, institutions now see that investing in bitcoin provides inflation protection, which means that bitcoin has become a kind of runaway currency like the Swiss franc. There are developing countries ruled by repressive regimes whose investors are fleeing hyperinflation and local corruption, and this cryptocurrency is also a perfect option for them because “you can’t pay.”
Bitcoin or gold?
This is where gold comes into the picture, which until now has been a security little exposed to movements in the stock market. On the other hand, the progress of bitcoin in recent years, especially this year, is such that it can now be measured by the market position of gold, and it is estimated that not only its stability but also its value could increase at the same level as the gold one. “The total market capitalization of bitcoin is currently $ 300-400 billion, that of gold is almost $ 9 billion, so now investors are even more confident in gold.
But there is a good chance that bitcoin will give up gold in a decade.
The maximum value this year is expected to be between $ 50,000 and $ 100,000. This is a conservative estimate, institutional investor analysts are forecasting a peak of $ 300-400 thousand, I think it is exaggerated. To reach the market capitalization of gold, a stable exchange rate of $ 500,000 would be needed ”, highlights the member of the board of the Hungarian Bitcoin Association.
What are the authorities doing?
Bitcoin is an open source digital currency, it is not under the control of any central bank, the decentralized software system cannot be manipulated, which gives it stability. But is it possible that a financial authority or any central bank will try to force the sector into a regulated framework in the future?
In the current circumstances, there is no authority that can redesign the operation and regulation of the bitcoin system from the outside, because if someone tried to do so, the members of the system would detect it immediately and prohibit it.
– Barnabas Debreczeni said. He said, on the other hand, that he would need immeasurable and multi-million dollar server mining capacity.
There is no production capacity that the mining machines can provide for the operation. Even the US Federal Reserve, the Fed, could not do this, it would separate itself from a separate chain at most, but it could only mine worthless bitcoins there under new regulation, but no one from the current chain would join.
Debreczeni said, adding that the system has regulators like bitcoin banks. Their numbers are growing in the US and this sector is now reviving in Europe. Starting on January 10, for example, the anti-money laundering law will apply to those who provide escrow services or exchange and brokerage activities, including bitcoin companies. From now on, NAV is the supervisory body of these companies.
In Hungary, the central bank still does not support the use of cryptocurrencies by Hungarian financial institutions.
In Germany, banks are already seizing this opportunity. However, the first draft of pan-European crypto regulation has already been prepared, based on which in the medium term the same rules will apply to cryptocurrency service providers as to brokers and custodians.
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