by Dr Rand Low
There is a renewed buzz around Bitcoin with its value surging towards the cryptocurrency’s high of almost $69,000 reached in 2021.
A Bitcoin ‘halving’ is also predicted to occur later this month, something that happens roughly every four years and historically contributes to a rise in the value of the cryptocurrency.
The investor optimism is a long way from December last year when you could have bought one Bitcoin for about US$16,500. If you had, you would be sitting on a gain of more than 300 percent going into March.
What’s going on with the price of Bitcoin?
The elusive creator of Bitcoin, Satoshi Nakamato, designed Bitcoin to be a decentralised financial transaction system that could operate independently of any governing or regulatory body such as a central bank.
As a result, Bitcoin prices are very volatile as it is purely market-driven.
Unlike the traditional financial system in which central bank governors and politicians pull various levers, Bitcoin is purely market-driven without any oversight.
For some affluent individuals, cryptocurrencies serve as 'digital gold', offering clandestine global transactions and a hedge against traditional financial systems.
Of course, cryptocurrencies also remain a preferred currency to purchase black market and illegal products and services.
Crypto investors have gone through two ‘winters’ so far - the first lasting from 2018-2020 and the second following the collapse of major cryptocurrency firms including FTX.
Although cryptocurrencies have gone through several crises in the last few years, we should recall that traditional financial markets have experienced similar negative market events such as the Great Depression, Black Monday and the Asian Financial Crisis.
What is the halving?
Historically, the price of Bitcoin goes up in anticipation of the halving, which will literally halve the amount of mining reward given to Bitcoin miners.
As such, it is anticipated that the supply of Bitcoin will drop because miners will struggle to remain profitable since the revenues they obtain from mining is reduced.
A drop in the supply of new Bitcoin thus makes existing Bitcoins more valuable.
Some mining groups will shut down or will merge with other groups as a response to this reduction in the mining rewards.
Is Bitcoin now a mainstream investment product?
I wouldn’t recommend Bitcoin to genuine investors who are risk-averse - it’s still high risk.
Blockchain, the technology that underpins Bitcoin, is very interesting and I recommend people get into it for educational purposes as it reveals the possibilities of a ‘decentralised’ financial system and unusual highly speculative products and services that are unavailable on traditional financial markets.
If you have a long view on cryptocurrencies, Bitcoin is the safest asset to buy in that space.
Bitcoin is still going to exist alongside our existing financial system and my personal view is that it’s not going to go away anytime soon.
As long as there are people who want to pay for goods and services globally without being tracked or go through the traditional financial system, there will be demand for cryptocurrencies.
Dr Rand Low is an Associate Professor of Quantitative Finance at Bond University whose research interests include cryptocurrencies. He has worked on Wall Street for Bank of America and BlackRock.