October 20, 2017    6 minute read

Why Buying Bitcoin Still Makes Sense in 2017: The Five Waves of Crypto

The Only Way Is Up?    October 20, 2017    6 minute read

Why Buying Bitcoin Still Makes Sense in 2017: The Five Waves of Crypto

Even as bitcoin’s price surged within striking distance of $6,000 on October 15th experts are still considering it an ultra-high return investment. Many — notwithstanding Warren Buffet, Jamie Dimon, Paul Krugman and Alan Greenspan — believe it to be one of the most undervalued asset classes around. When asked how one values bitcoin in an interview with CNBC, author and CEO of Bank To The Future Simon Dixon replied that some people look at it taking a small percentage of each asset class: “Even if it takes just 5% of investments made in gold as a hedge against financial uncertainty then that would create a $25,000 bitcoin.” Billionaire private investor Mike Novogratz has also stated he would not be surprised to see the price of bitcoin hitting over $10,000 next year. Trace Mayer, an early evangelist of the cryptocurrency and host of the ‘Bitcoin Knowledge Podcast’ tweeted that bitcoin may well jump to $27,000 in just a few months time.

Is It a Bubble?

The question is irrelevant. Virtually every novel technology wave has its respective bubble as new capital looking to “make a killing” flows in. This is not necessarily a bad thing, as there are positive effects as well. The extra cash can spur innovation, accelerating the pace at which things move forward. Moreover, increased attention leads to more qualitative exposure which, in the case of exciting innovation such as decentralised payment networks, can only be a good thing as it leads to more enthusiastic followers.

In an interview with Business Insider, co-founder of Fundstrat Global Advisors Thomas Lee mentions how bitcoin has closely followed the behaviour of a social network. The more engagement there is, the more the value rises. Using Metcalfe’s law, which states that the value of a (telecommunications) network is proportional to the number of the of connected users in the system squared (n2), Lee built a short-term valuation model, valuing bitcoin as the square function of the number of users multiplied by the average price. This very simple equation explains 94% of bitcoin’s movements over the past four years.

Lately, the price has largely been driven by institutional investors stepping into the game and by growing interest from Asia, notably China, South Korea and Japan. Although China and South Korea have clamped down on the currency, investor interest is continuing to rise with some reports arguing that traders in both countries were purchasing bitcoins with premiums of up to $300 during the latest rally. So why would people do such a thing?

The Waves

Since bitcoin first came to the scene, there have been five notable waves. The first was the advent of the cryptocurrency itself. Bitcoin started getting traction because of its sound and decentralised monetary policy. It provided a store of value independent of any government or central bank, a great value proposition at the time considering the conjuncture of severe financial crisis.

Then there was the growing universe of altcoins where people tried to copy bitcoin by creating alternative versions, some of which stuck and delivered incredibly high returns. What followed suit was the emergence of billion-dollar unicorns such as Coinbase and Kraken (Coinbase currently has a post-money valuation of $1.6bn).

More recently, one witnessed the trend of ICO campaigns, with even celebrities like Floyd Mayweather, Paris Hilton and DJ Khaled trying to catch a piece of the pie by promoting specific coins. Hundreds of companies have now started creating and distributing virtual tokens in order to raise money for their venture, many of which have partnered up with celebrities to get the word out. Because so many people have made money in the sector, many are pumping their wealth into these projects in order to speculate (especially early bitcoin adopters who also do so to avoid taxes).

The latest and most remarkable wave is that of forks or splits which emerge out of disagreements on common rules regarding governance. Now that Bitcoin has reached its scale, developers are disagreeing about how the technology should move forward. When a blockchain diverges into two potential paths forward — e.g. with regard to a network’s transaction history or a new rule determining what makes a transaction valid — it splits into different communities which show support for one choice over the other.

Naturally, the value of both versions of a coin after a hard fork is determined based on user sentiment and demand/supply in the market. It is interesting because, essentially, these forks act as a sort of dividend for everyone holding bitcoin. The upcoming bitcoin hard fork on the 25th of October is known as Bitcoin Gold. This new would-be cryptocurrency’s community is defining it as “a community-activated hard fork to make mining decentralised again“. By changing bitcoin’s original protocol, Bitcoin Gold advocates aim to make a new democratised version which will be mineable by using cheap GPUs as opposed to the expensive ASIC miners, which have been acting as a strong barrier to entry for an average user. Their intention seems noble. Whatever the outcome the fact of the matter is that just as with Bitcoin Cash, free Bitcoin Gold coins will be airdropped to anyone owning bitcoin at the time of the fork.

Sky’s the Limit?

To conclude, one should consider that going from the current price of around $5,647 (October 19th 9:17 PM) to a $1m bitcoin would represent a relatively mild gain when compared to the gains bitcoin has made in the past seven years. In fact, $100 worth of bitcoin bought at the purchase price of approximately $0.003 seven years ago, would be equal to roughly $188m today, a gain of about 1,800,000%. Meanwhile, a jump from $5,647 to $1m would represent a gain of “only” 17,609%. Unfortunately, there are no time machines yet, but it is still affordable to invest in some bitcoin.

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