Bitcoin Value - Most people get into Bitcoin with the intention of investing. Having read stories about early Bitcoin adopters making a huge profit, potential investors have flocked to the currency in droves and they all want to know one thing: “How can I hit it big in Bitcoin?”
I am not someone you should turn to for serious financial advice. I do, however, have extensive experience with Bitcoin, and there is one solid piece of advice I feel I can offer to potential Bitcoin investors: Hold your coins when the price is going down and hold your coins when the price is going up. Just hold your coins and wait.
I can’t guarantee that Bitcoin will take off but if it does, all the current worry about Bitcoin’s price and day-to-day stability will become irrelevant. There will only ever be 21 million bitcoins. If a substantial portion of international trade began using Bitcoin, the price of the currency would become astronomical. Add in the potential of stock trading, real estate deeds, and all the other possible uses for Bitcoin that seem just around the corner, and it becomes clear that its current price is extremely low, if you believe Bitcoin has a place in the future of finance.
This is why the one piece of advice I give to any would-be Bitcoin investor is to simply buy and wait. This tactic of holding on to your Bitcoin, commonly referred to as “HODL” (a humorous misspelling of “HOLD”) in the community, is one of the main doctrines of the Bitcoin faithful. As much as I detest adherence to the almost-religious dogma in the Bitcoin community, I will readily admit this particular tenet exists because there is some truth to it.
Bitcoin has seen at least three major spikes in price and they all followed the same pattern. First, the coin price drops slightly; then it jumps quickly to unprecedented heights. Then it falls a significant amount—to half its value or less—but always above the previous jump’s top value. Later, it again jumps to heights that dwarf the previous jump.
This pattern repeated itself from 2009 until 2014, when one of the “rules” of Bitcoin’s price was finally broken. In early 2015, the price of Bitcoin dropped below $200, a lower value than its price before its previous late 2013–early 2014 price spike.
This exception doesn’t mean the pattern of massive spikes has come to an end, however. By the time you read this, it could have happened again. Or maybe not. The only thing that the drop of January 2015 proved is that things are unpredictable in this new market and any pattern used to predict the price is likely to be broken as soon as it becomes useful.
Savvy people have been looking for patterns in the stock market for decades without any success, and the stock market is filled with people who are (supposedly) intelligent investors. It also operates during certain times of the day and is mostly contained within the nation it operates in. Bitcoin trade goes on 24/7, has millions of unpredictable amateur investors all over the world, and is relatively unregulated. Predicting the price of something this chaotic would take Nostradamus-like talents.
That said, there is plenty of reason to expect that as long as Bitcoin plays a growing role in the Internet economy it will—eventually and over the long haul—increase in price. This “if” is a fairly big one—although blockchain technology will certainly continue to be used more and more, there is no guarantee that Bitcoin will be used as the currency of choice.
There are a lot of things that give Bitcoin its value. One of the most important factors, after demand and utility, is how difficult it is to create a bitcoin. When Bitcoin got its first exchange rate in October 2009, it was calculated based on how much electricity was consumed by mining operations when a bitcoin was created.
Although there are other factors that go into Bitcoin’s price, the cost of creation does create something of a floor for Bitcoin’s true value. If it cost two dollars to create a single bitcoin (it costs far more, but to keep things simple, let’s assume it’s two dollars), then it is safe to assume that someone selling a bitcoin would want at least two dollars for it.
That doesn’t mean the value will never drop below two dollars, because speculative trading and increased merchant adoption—without a corresponding increase in merchant holding—can cause the price to temporarily drop lower than what the miners would want to sell their Bitcoin for. Bitcoin is distributed enough that miners aren’t the only group that has an effect on its exchange rate.
But the rate does ultimately come from them. If a bitcoin costs two dollars to make today and 10 dollars tomorrow, but adoption, utility, and demand all remain the same, then it is a fairly sure bet the price will go up. This is good news for long-term Bitcoin investors, because Bitcoin is consistently becoming more difficult to create; and roughly every six years, new bitcoins become twice as rare.
Bitcoin is rewarded to miners based on who solves a block. Each block used to be worth 50BTC but this went down to 25BTC a few years ago. The next block-halving—when the reward for solving a block is cut in half—is expected in 2016, likely in June, and will see the reward drop to 12.5 bitcoins per block.
Therefore, in addition to the regular difficulty increase, it is about to become significantly more difficult to create a bitcoin.
The block-halving will not coincide directly with a jump in the price of Bitcoin. Speculative traders attempt to factor in sure bets like block-halving when deciding on a price they are willing to pay for Bitcoin. However, as I’ve mentioned, speculative traders aren’t the only group that has an influence on the price of Bitcoin. They are constantly at odds with miners who only care about the cost of creating a bitcoin compared to the price of Bitcoin.
They deal with the current reality, rather than price predictions. If a bitcoin cost 10 dollars to produce but the price had dropped to nine dollars, at least some miners would wait for the price to rise rather than sell at a loss. Speculative traders might be bearish or bullish—the terms used in financial markets to describe a downward or upward trend or prediction, respectively—on the price of Bitcoin and deal based on that prediction. In contrast, miners are only worried about their electricity bill.
I am not trying to disparage speculative traders. Their job is to imagine what the world will be like in the future—be it 20 minutes or 20 years—and make decisions based on that prediction. Miners don’t have that luxury and have to make cold, calculated decisions based on what is going on now, not what might be in the future.
So speculative traders might think they are accounting for the reward-halving, and in many ways they are. Everyone knows it is coming and everyone is building it into their expectations, but things will change when their predicted future meets with present-minded miners. The question of when, exactly, this development will cause an increase in the price of Bitcoin is up in the air. The jump could come shortly before or months after the reward halves.
It may never come because some unforeseen problem tanks or inflates the price of Bitcoin beforehand. What is for sure, however, is that Bitcoin will become more difficult to produce, which will cause miners to hold on to their bitcoins until they are valuable enough to at least break even.
There are countless strategies when it comes to investing in Bitcoin. Everyone has their own system and there certainly is a lot that can be gained by riding the volatile swings in Bitcoin’s price. Ultimately, the safest advice is simply this: buy some Bitcoin, put it in a safe place (like a paper wallet), and then leave it alone. Come back in five years and reevaluate.
Responding to the assertion that 2014 was Bitcoin’s worst year, the Bitcoin evangelist Andreas Antonopoulos once told would-be investors to give Bitcoin some time. After pointing to the $500 million in venture capital investment into Bitcoin companies, he insisted:
Give us two years. Now what happens when you throw 500 companies and 10,000 developers at the problem? Give [it] two years and you will see some pretty amazing things in bitcoin.
I disagree with the two-year timeline put forth by Antonopoulos but not with the general sentiment behind his statement. Two years is not realistic; although that amount of time might seem like an eternity within the cryptocurrency ecosystem, the general public—and especially the financial markets—don’t move at the same speed.
But Bitcoin is growing; this is undeniable. It also seems likely that in two years’ time it will have grown more, and more traditional finance companies will be on board and more borderline users will have fallen over to the Bitcoin side of the fence. As that happens, there will be a lot of companies looking to acquire Bitcoin, if for no other reason than as fuel for their own blockchain-based services.
I don’t disagree with Antonopoulos’s quasi-prediction in general, however. The block-halving of 2016 and the continued increase in acceptance and investment indicate he is likely correct. But I would be careful about claiming that 2017 represents some kind of deadline (which some might surmise from Antonopoulos’s comment). Bitcoin Value has been nothing if not unpredictable.
There has only been one constant in the Bitcoin world so far: Bitcoin is consistently becoming more difficult to create. As long as the currency continues to be used and adopted, the price will have to follow.
