Reasons Behind Bitcoin’s Meteoric Rise

• Toshendra Kumar Sharma
• January 27, 2018

In recent months, Bitcoin and the cryptocurrency space, in general, have received a lot of attention because of the explosive gains in price that cryptocurrencies like Bitcoin have seen. But what is the reason behind this sudden surge? Let’s take a closer look.

A New Asset Class

Up until the advent of cryptocurrencies in 2008, the three main asset classes for people to hold their wealth in were equities, bonds, and cash. But the main problem with these assets was that their value was inextricably linked to a centralized organization like a government in the case of bonds and cash or a private organization in the case of equities. In such a centralized model, an unjust amount of control over personal wealth remains in the hands of a few actors that are in power. This has been shown to be problematic throughout history time and again as governments are toppled and organizations cannot sustain themselves when faced with new competition. That is precisely why a new decentralized asset class that is not tethered to a central bank or government is necessary. For such an asset, the free market decides the price based on demand and supply. Bitcoin ultimately lets an individual become their own bank and ultimately have a lot more say in how their personal information and wealth is used as the total circulating supply is fixed at 21 million Bitcoins.

Venezuelan president Nicolas Maduro on Monday announced an oil-based cryptocurrency, Petro, in an effort to bring his country out of the current economic crisis it’s in. Cost of every day increased by 800% in 2016 due to inflation and in times like these when the central banks can dilute the existing cash supply by printing more money, decentralized cryptocurrencies seem like safe havens for personal wealth despite the price volatility. The value in Bitcoin comes from the fact that a Bitcoin is worth exactly the same everywhere in the world regardless of the health of the economy of the country a person resides in. This is a very powerful concept as no other asset has existed in history beside gold that could be used as an effective store of value. Bitcoin also offers several advantages over gold like easy of transmission and storage as well as instant liquidity over the internet.

Metcalfe’s Law

Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system. So far the price of Bitcoin and Ethereum, the two main cryptocurrencies has had a very strong positive correlation with Metcalfe’s Law which makes sense, since, as the number of users of Bitcoin increased, so does the demand which puts an upward pressure on price. Below is the graph of ‘Bitcoin’ Google Search Trends. From the graph, it is clear that as the number of people searching for Bitcoin increased, so does the price. This phenomenon becomes even more pronounced as Bitcoin breaks new all-time highs as it receives more media coverage and more people are drawn to it creating a positive feedback loop that further drives the price up.

Bitcoin Futures on NASDAQ, CBOE, and CME

The three biggest exchanges in the world, the Chicago Mercantile Group Inc., the Chicago Board Options Exchange Global Markets Inc., and NASDAQ have all expressed interest in listing Bitcoin futures as early as Q2 2018. Currently, the exchanges that Bitcoin trades on are largely unregulated but CME, CBOE, and NASDAQ are all heavily regulated which means that Bitcoin will gain an air of legitimacy because of this move. This move also brings in institutional money from investors and bring cryptocurrencies closer to real-world adoption.

Support from Wall Street Veterans and Industry Leaders

In 2017, several high profile investors like venture capitalist Tim Draper, The Winklevoss twins and billionaire investor Mike Novagratz have publicly come out in support of Bitcoin and have also taken significant positions in Bitcoin. Mike Novagratz was among the first people to publicly declare $10000 Bitcoins in November and $40000 Bitcoins by the end of 2018. Support from these veteran investors is also a huge legitimizing influence over Bitcoin as a lot of smaller investors also follow their financial advice.