Bitcoin has made quite a splash in 2017. The cryptocurrency has more than doubled since the beginning of the year and is up nearly 740% in the past two years. The epic run-up has certainly contributed to growing sentiment that bitcoin is a bubble, plain and simple. After all, it soared close to 10,000% in 2013 before crashing. Is this time really different?
Well, it's impossible to deny that speculation and day traders have contributed significantly to bitcoin's rise this year. However, it's also possible to argue that bitcoin and other cryptocurrencies aren't overvalued based on their long-term potential to serve as a global infrastructure for both storing value and executing financial contracts.
Therefore, when dissecting bitcoin's 740% rise in the past two years, it's important to take into account both the irrational driving forces and tangible progress being made on multiple fronts. Here are three reasons bitcoin has rocketed higher in the the past two years.
1. Acceptance and regulation
The potential of blockchain technologies is tremendous. While there are scaling issues and other shortcomings that need to be addressed for bitcoin and its peers, cryptocurrencies are gaining acceptance around the world every day. From Subway to Microsoft, Whole Foods to Overstock.com, you may be surprised at the reputable businesses that accept bitcoin as a form of payment.
It's important to note that the acceptance -- and even regulation -- of cryptocurrencies is progressing more swiftly outside the United States. In fact, there's an arms race under way in Asia.
On April 1, bitcoin became a legally recognized method of payment in Japan. On July 1, Australia followed suit and went a step beyond, passing laws that protect businesses that use bitcoin and updating financial regulations to avoid double-taxing cryptocurrencies. To keep pace with regional peers, South Korea plans to up the ante even further. The country will regulate cryptocurrency exchanges, giving them legal grounds to operate, which will also help to protect investors from losses in the event bad actors manipulate exchanged.
Many other countries see the long-term potential of cryptocurrencies and regard them as critical parts of economy-boosting fintech innovation. America is still largely asleep at the wheel.
2. Better hardware
Bitcoin and other cryptocurrencies are created through a process called mining -- and the more computer processing power, the better. Another force driving digital currencies higher in 2017 is the availability of new graphics cards from NVIDIA and Advanced Micro Devices that didn't exist a few years ago.
Specific digital currencies are best mined with specific hardware. For example, given where bitcoin is in its mining life cycle, it's next to impossible to profitably mine the digital currency using GPU-heavy graphics cards. The electricity consumed in the process is simply too costly at the moment. Big-time miners can still use ASICs, however, which are more commonly associated with autonomous-driving and machine-learning opportunities.
The good news is the mining process for the second-leading cryptocurrency, ethereum, is much more energy efficient than that for bitcoin. That means GPUs are still profitable for ethereum mining, at the moment. The better news is that NVIDIA, Advanced Micro Devices, and Intel can add cryptocurrency mining as an additional growth catalyst for current and future products.
This is the default reason given for bitcoin's amazing rise in the past two years. While speculation definitely plays a significant role, there has also been tangible progress on multiple fronts driving valuations higher. But it's easy to see cryptocurrency markets haven't always been rational.
- Speculation here is no different than in the stock market. It works in a bit of a positive feedback loop. Bitcoin's rise earlier this year increased the attention given to other cryptocurrencies. That led several digital currencies to gain more than 1,000%, which led to more attention on bitcoin. And so on.
- At various times this year, cryptocurrency trading volumes have exceeded those of several major stock exchanges, including Australia and Thailand.
- The rise of ethereum has had more to do with rising prices in cryptocurrencies, including bitcoin, than most people think. The newer cryptocurrency and blockchain addresses several of the shortcomings of bitcoin, which has caught the attention of many. It peaked at around $400 after beginning the year at just $8 -- marking a nearly 5,000% gain in less than six months. Still, ethereum has a market cap of about $24 billion. Bitcoin is valued at $42 billion.
What does it mean for investors?
From vendors looking to increase the flexibility of payments and even avoid credit card transaction fees to countries eager to encourage innovation in fintech, the rise of bitcoin in the past two years has been helped by events that have staying power. Of course, your crazy Uncle Lenny may be contributing to the run-up in cryptocurrency valuations, too, but at this point investors should expect cyrptocurrencies to be sticking around in some form or another -- whether that's bitcoin remains to be seen.