Tom Wilson: Is bitcoin’s 2020 rally more than just another flash in the pan?

Tom Wilson: Is bitcoin’s 2020 rally more than just another flash in the pan?

Bitcoin is well known for its wild swings in value by now, but there could be more behind this latest spike than meets the eye, writes Tom Wilson.

CRYPTO analysts are split on whether bitcoin’s rise this year is driven by unique factors, or is just its latest bout of volatility. But many agree on one factor — an upcoming cut to the supply of bitcoin.

Bitcoin has soared by almost half this year, to more than $10,000 (€9,200), for the first time since October. On Tuesday, it hit its highest level in five months.

The cryptocurrency’s 11-year history is replete with fast ascents and equally rapid plunges. In late 2017, it rose three and a half times in just 35 days to reach almost $20,000.

It then slumped 70% in seven weeks. Such wild and often inexplicable swings are why bitcoin faces a struggle to become a functioning currency.

This time around, some market players point to a confluence of drivers not seen before. Arcane tech factors, expectations for mainstream acceptance, and macroeconomic trends are leading markets to look again at bitcoin’s worth, they say.

“You can argue that there is a fresh valuation going on,” said Russ Mould, investment director at AJ Bell, a stockbroker who oversees assets worth $71bn.

Most fundamentally, many cite growing demand for bitcoin before its latest “halving” — a 50% cut in the production of the cryptocurrency due in May that is one of the few observable events known to materially impact price.

    What is bitcoin?

    Bitcoin is a consensus network that enables a new payment system and a completely digital money.

    It is the first decentralised peer-to-peer payment network that is powered by its users, with no central authority or middlemen.

    From a user perspective, bitcoin is pretty much like cash for the internet.

    Bitcoin can also be seen as the most prominent triple-entry bookkeeping system in existence.

    Bitcoin is the first implementation of a concept called cryptocurrency, which was first described in 1998 by Wei Dai on the cypherpunks mailing list, suggesting the idea of a new form of money that uses cryptography to control its creation and transactions, rather than a central authority.

    The first bitcoin specification and proof of concept was published in 2009 in a cryptography mailing list by Satoshi Nakamoto.

    Satoshi left the project in late 2010 without revealing much about himself. The community has since grown exponentially, with many developers working on bitcoin.

A rule written into bitcoin’s underlying code slashes the number of new coins awarded to the miners behind the global supply of bitcoin.

Tom Wilson: Is bitcoin’s 2020 rally more than just another flash in the pan?

In the year after the two previous halvings, in November 2012 and July 2016, bitcoin rose around by 80 times and four times respectively. The exact proportion of the gains caused by the halving is unclear.

“It’s a rare observable factor — if you look at previous events, in each case there has been a quite clear and discernible spike in the value of bitcoin,” said payments consultant Windsor Holden, who tracks crypto and blockchain.

HYPE CYCLE

But others doubt bitcoin’s latest rally is underpinned by anything more substantial than the previous booms.

“The recent rally has been driven by the usual hype cycle that we have very reliably seen every two to three years,” said Michel Rauchs, author of several Cambridge University studies on cryptocurrencies and blockchain tech.

“We have these mini-bubbles, and the momentum that it creates — bitcoin first, then these other coins. It’s a self-fulfilling prophecy.”

Major cryptocurrencies that tend to move in correlation with bitcoin have also gained this year. Ethereum has more than doubled; Ripple’s XRP token is up over 75%.

Tom Wilson: Is bitcoin’s 2020 rally more than just another flash in the pan?

Other factors cited for the rally, such as greater demand for assets uncorrelated to mainstream markets following the recent US killing of an Iranian military commanderlast month, are also questionable.

Bitcoin’s “safety” characteristic is unclear. It has regularly fallen in times of geopolitical stress in recent years.

Looser central bank policy is also given as a reason bets on riskier assets. But that link is hard to prove, too.

Bitcoin has fallen during previous spells of easy money.

DIGITAL DOLLAR?

Also widely cited are expectations that cryptocurrencies will go mainstream, as central banks step up their research into digital currencies after Facebook’s push to offer its Libra coin. Some, such as China’s, are getting closer to issuing their own.

And in comments that traders said stoked buying in bitcoin, US Federal Reserve chairman Jerome Powell told US lawmakers on Tuesday that the Fed was “working hard” on the issue, while it remained undecided on any digital dollar.

Central bank interest is also problematic as a reason for bitcoin’s rise, said Mr Rauchs.

“People tend to mix up and conflate these different concepts that are actually fundamentally different from one another,” he said.

“This creates a bubble where you conflate everything together and everything appreciates.”

Still, in the short-term, crypto traders interviewed by Reuters said that the cut to the supply of bitcoin was likely to loom largest for investors.

“Things are aligning,” said Jamie Farquhar, portfolio manager at crypto firm NKB Group.

“But the real thing that people are looking at is the halving.”

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