Soaring highs and sobering lows: a look at Bitcoin’s roller-coaster ride in 2017
The idea of one global currency that stays out of the hands of conniving regulatory authorities is very appealing. Maybe Bitcoin is what we needed all along to prevent economic catastrophes and ‘great depressions’. But cryptocurrencies still have a long way to go, in terms of infrastructure as well as technology, before they reach those levels of ubiquitous acceptance.
Today, however, the cryptocurrency is viewed as more of a get-rich-quick scheme rather than a long-term investment. The technology is still in its early stages and the market is being swayed more by people looking to make a quick buck rather than those who believe in the currency’s premise. This is evident in the stratospheric rise of Bitcoin prices in 2017, which has occurred without any intrinsic value being added to the currency.
On January 2, the price of one BTC was $1,026; today, it is $18,050 (as of writing this). As the price kept increasing, more people began investing and trading in it, thus driving its price up even more, and ad infinitum. In a market that is so volatile, the smallest news or event can often cause massive spikes in the price over a matter of minutes and hours.
Bitcoin has had a year of many ups and downs. It has made impressive progress in some areas while in others it has faced stubborn roadblocks. Technological problems, infrastructural handicaps, and regulatory issues are some of the key difficulties lurking underneath the cryptocurrency’s alluring prices. Here’s a rundown of the key highs and lows that shaped its journey in 2017:
Riding all-time highs
While Bitcoin’s incredible valuation rally is a great success story in itself, events and market belief in the cryptocurrency have also been instrumental in its upward trajectory. From increased acceptance and usage for commercial transactions to official backing from regulators and authorities, here are the key positive events that helped the cryptocurrency grow in 2017:
Increased acceptance in South Korea and Japan
While several countries are worried about the impact Bitcoin can have on their fiat currencies, South Korea and Japan have shown no hesitance in embracing this new digital currency.
After granting Bitcoin the status of legal tender as a means of settlement in April, Japanese regulatory authorities then issued trading licenses to 11 exchanges in November – a move that has made trading in the Japanese Yen the largest currency pair by volume, ahead of even the US Dollar. Furthermore, retail investors in the country have begun trading in cryptocurrencies, and a Japanese company, GMO Internet, has even announced that it will start paying part of its employees’ salaries in bitcoins.
Home to several cryptocurrency exchanges, South Korea has been both wary and accepting of Bitcoin. While the country’s government allows the use of the cryptocurrency as a mode of payment, it’s extremely careful about its use for illegal activities, and as such ordered a ban on Initial Coin Offerings (ICOs) in September. A blockchain association in the country is currently trying to pass new regulations that will increase transparency in cryptocurrency trading as well as protect inexperienced consumers from high trading losses. While regulations are usually scorned upon by the cryptocurrency community, certain members believe that ‘right’ regulations would rather nurture and legitimise the growing market.
While Bitcoin was surging from peak to peak at incredulous rates this year, many stalwarts of the financial community continued to dismiss it as a bubble or a fad that would soon run out of steam. Recently, however, a new development has caused a new stir among regulators and brokers – the opening of Bitcoin futures trading in the US.
Bitcoin futures trading was first offered on the Cboe (Chicago Board Options Exchange) on December 10 and will soon also be made available by the CME Group on December 18. This has led to the rise of a major concern among trading firms – will the cryptocurrency threaten the stability of the present financial system, or will it change the industry for the better?
Both companies, Cboe and CME, maintain that they are catering to their clients’ increasing interest in the cryptocurrency market and allowing investors to participate with transparency. But the volatility of Bitcoin’s price, which routinely fluctuates between hundreds and thousands of dollars in a day, places its futures contracts in unchartered territory. Thomas Peterffy, an investing magnate who started the futures industry in 1968, is concerned with how customer losses in bitcoin futures trading will affect the rest of the market and brokers. But the lure of the service so powerful that Peterffy’s brokerage, at the behest of his clients, is clearing Bitcoin futures for some accounts.
SegWit, or Segregated Witness, is a soft fork change in the transaction format of Bitcoin that addresses the issues of scalability and malleability. Activated in August this year and first proposed by Bitcoin Core contributor Pieter Wuille in 2015, SegWit has been the topic of contentious debate and in-fighting within the Bitcoin community for a long while.
Several developers believe that SegWit will allow the implementation of more advanced features and technologies to bolster Bitcoin’s use at large. One of them is The Lightning Network, a way to speed up small Bitcoin transactions while lowering transaction fees and improving security. However, there are several others who believe that by not increasing the block-size limit, SegWit does nothing but delay the bitcoin scalability issue. These same people also believe that the upgrade unfairly favours those who treat Bitcoin as a digital asset rather than as a transactional currency.
The chasm between these two sides continued to expand until finally the decision was reached to hard-fork Bitcoin and create a new cryptocurrency entirely. The original currency retained the Bitcoin (BTC) moniker while the new one was called Bitcoin Cash (BCH). The fork took place on August 1 and BCH was soon available for trading on several cryptocurrency exchanges. Bitcoin Cash is currently the fourth-most valuable coin in terms of market cap (narrowly behind Ripple), while Bitcoin is at the top spot with a $230+ billion margin.
Hitting the lows
At the same time that the above developments have helped Bitcoin become a stronger and more robust cryptocurrency, certain events have also served to erode value. The volatility of the currency and fear of impact on financial systems has led to many governments and regulators questioning the usefulness of Bitcoin, with some even banning them. Here are some of the events that marred the glow of the Bitcoin bubble in 2017:
China’s ban on ICOs and Bitcoin trading
China was among the largest Bitcoin markets this year before its government cracked down on the cryptocurrency. Citing problems like money laundering, pyramid schemes, raising of ‘fake capital’ through ICOs, and other financial crimes, Chinese regulatory authorities made it illegal for mainland residents to trade digital currencies or conduct any Initial Coin Offerings. This announcement came as a blow to China’s mammoth Bitcoin industry which, courtesy of the myriad miners in the country, accounted for a vast amount of the world’s Bitcoin trade.
Fuelled by the news that exchanges in China will be pulling down their shutters and the country’s miners may be stuck in legal limbo, the price of Bitcoin, and other altcoins, suddenly plummeted. But they weren’t down for long. The entire concept of cryptocurrency is based on the principle of decentralisation, and the community was quick to understand the lack of impact China’s move would have on Bitcoin.
The Chinese trading exchanges who were no longer allowed to operate on the mainland simply moved base to offshore locations like Singapore, Hong Kong, Estonia, and South Korea. Mining, too, continued to take place at more or less the same scale it had before the announcement. The price of Bitcoin continued its astronomic climb undeterred.
Income Tax Department goes after Indian Bitcoin exchanges
The Reserve Bank of India, backed by the government, has openly voiced its discomfort and concerns with cryptocurrencies like Bitcoin. The unregulated, and oftentimes untraceable, nature of the digital currency makes it liable for use in crimes like money laundering, paying bribes, and even purchasing illegal goods and services on the dark web. The RBI has also expressly stated several times that those trading in cryptocurrencies are doing so at their risk and that none of the exchange-based trading companies have procured an operating license from them.
With Indians trading in these unregulated cryptocurrencies despite such warnings, the Income Tax department on December 13 visited the premises of nine exchanges across Delhi, Bengaluru, Hyderabad, Kochi, Mumbai, and Gurugram. The IT department is collecting information on the exchanges and the investors using their platforms with the goal of implementing a tax on the trading of virtual currencies. Reports suggest that a short-term 30 percent capital gains tax may be levied on bitcoins held for less than three years while a 20 percent tax will be incurred on longer hold durations.
The problems of Bitcoin mining
With the price of Bitcoin and altcoins rising each day, several people around the world recognised the vast wealth that could be made through mining cryptocurrencies. From bustling countries like China and the US to desolate ones like Iceland and Mongolia, Bitcoin mining farms have popped up around the globe in thousands, unearthing a little bit more of the new-age gold one hash at a time. But the rise in popularity of Bitcoin mining has created two chief problems.
The first is the inadvertent centralisation of what was meant to be a decentralised currency. In its early days, Bitcoin could be mined by low-powered CPUs and GPUs. However, as competition in the network increased, specially-built FPGA and ASIC rigs – devices with vast processing capabilities – had to be used instead. Since these devices are expensive and require large amounts of electricity to operate, those who could afford to run them – companies like Genesis Mining and Bitmain – quickly monopolised Bitcoin mining. It was due to this that Bitcoin was hard-forked to create Bitcoin Gold in October. This new cryptocurrency (different from Bitcoin Cash), makes use of the Equihash Proof-of-Work algorithm from Zcash that makes it ASIC-resistant. While the intention of Bitcoin Gold’s creation was to create a more centralised currency, several criticisms, controversies, and cyber attacks have marred its image quite drastically.
The second problem brought about by cryptocurrency mining is that these ‘farms’ are responsible for consuming an astronomical amount of electricity. Bitcoin mining alone, for instance, consumed 30.23 Terawatt-Hours (TWh) as of November 27, which is more than the individual consumption of 159 countries. While certain mining companies have opted to use solar, hydro, or even geothermal energy for their power needs, the clear majority of miners continue to use electricity derived from coal. If electricity consumption continues at this rate, researchers believe that cryptocurrency mining will consume all the world’s electricity by 2020.
The road ahead
Despite the setbacks, and buoyed by the positive developments, Bitcoin has continued its rally to unexpectedly high levels. Investors continue to flock to the cryptocurrency in greater numbers, and more and more regulators are keeping a close watch on progress (Donald Trump recently signed a bill authorising $700 billion for deep research into Bitcoin and blockchain and its applications). As we enter 2018, everybody is wondering the same thing – how far will Bitcoin’s rally take it? Is it going to keep rising, or is it a bubble that will eventually burst?